THE FINANCIAL COLLAPSE OF HEALTHSOUTH

Part 1

HEARING

BEFORE THE

SUBCOMMITTEE ON

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

OCTOBER 16, 2003

Serial No. 108–53

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

THE FINANCIAL COLLAPSE OF HEALTHSOUTH—Part 1

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THE FINANCIAL COLLAPSE OF HEALTHSOUTH

Part 1

HEARING

BEFORE THE

SUBCOMMITTEE ON

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

OCTOBER 16, 2003

Serial No. 108–53

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

2

COMMITTEE ON ENERGY AND COMMERCE

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

RICHARD BURR, North Carolina

Vice Chairman

ED WHITFIELD, Kentucky

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

ERNIE FLETCHER, Kentucky

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

DARRELL E. ISSA, California

C.L. ‘‘BUTCH’’ OTTER, Idaho

JOHN D. DINGELL, Michigan

Ranking Member

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

TOM ALLEN, Maine

JIM DAVIS, Florida

JAN SCHAKOWSKY, Illinois

HILDA L. SOLIS, California

DAN R. BROUILLETTE, Staff Director

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

JAMES C. GREENWOOD, Pennsylvania, Chairman

MICHAEL BILIRAKIS, Florida

CLIFF STEARNS, Florida

RICHARD BURR, North Carolina

CHARLES F. BASS, New Hampshire

GREG WALDEN, Oregon

Vice Chairman

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

(Ex Officio)

PETER DEUTSCH, Florida

Ranking Member

DIANA DEGETTE, Colorado

JIM DAVIS, Florida

JAN SCHAKOWSKY, Illinois

HENRY A. WAXMAN, California

BOBBY L. RUSH, Illinois

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

C O N T E N T S

Page

Testimony of:

Cohen, Martin, Senior Managing Director, FTI Consulting ......................... 28

Cullison, Kelly, former Vice President of Compliance, HealthSouth Corporation .......................................................................................................... 30

Goodreau, James, former Chief of Security, HealthSouth Corporation ....... 75

Hale, Brandon, former Executive Vice President of Administration, Corporate Security and Compliance Officer, HealthSouth Corporation ......... 75

Henze, Diana, Assistant Controller, HealthSouth Coorporation .................. 21

Horton, William, former Executive Vice President and Corporate Counsel,

HealthSouth Corporation ............................................................................. 75

Jones-Smith, Susan, former Vice President of Finance and Reimbursement, HealthSouth Corporation .................................................................. 19

Sanders, Teresa, former Group Vice President and Chief Auditing Officer

of HealthSouth Corporation ......................................................................... 24

Schlatter, Steve, former HealthSouth Physical Therapist ............................ 26

Scrushy, Richard, former Chairman and CEO, HealthSouth Corporation .. 16

Smith, Greg, Chief Auditing officer, HealthSouth Corporation .................... 32

Tanner, Anthony, founder and former Corporate Secretary and Compliance Officer, HealthSouth Corporation ....................................................... 75

Vines, Michael, former HealthSouth Employee, Corporate Fixed Assets

Department ................................................................................................... 27

(III)

(1)

THE FINANCIAL COLLAPSE OF

HEALTHSOUTH

THURSDAY, OCTOBER 16, 2003

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ENERGY AND COMMERCE,

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS,

Washington, DC.

The subcommittee met, pursuant to notice, at 9:30 a.m., in room

2123, Rayburn House Office Building, James C. Greenwood (chairman) presiding.

Members present: Representatives Greenwood, Bilirakis,

Stearns, Burr, Bass, Walden, Ferguson, Rogers, Tauzin (ex officio),

and DeGette.

Staff present: Casey Hemard, majority counsel; Kelli Andrews,

majority counsel; Ann Washington, majority counsel; Yong Choe,

legislative clerk; Edith Holleman, minority counsel; and Voncille

Hines, research assistant.

Mr. GREENWOOD. The hearing of the Committee on Energy and

Commerce Subcommittee on Oversight and Investigations will

come to order, and the Chair recognizes himself for the purpose of

making an opening statement.

This morning we hold the first day of our hearing to examine allegations of accounting fraud and poor corporate governance policies at HealthSouth, the largest provider of outpatient rehabilitation services in the United States. This committee has a well recognized history of bringing important matters of corporate governance and accounting fraud to the forefront of public awareness in

a timely and thorough fashion.

In the last Congress, this Committee took the lead in examining

the corporate governance practices and accounting fraud allegations associated with the financial collapse of several companies, all

of which were in industries that fell within with the Energy and

Commerce Committee’s broad jurisdictional ground. For example,

the Enron investigation focused on corporate governance practices

and accounting matters associated with the energy industry. Questionable accounting practices at telecommunication companies were

brought to light during our hearings last year on Qwest and Global

Crossing.

We now turn to another area that falls within this committee’s

jurisdiction, the health care industry. The HealthSouth hearings

will provide this committee the opportunity to examine various corporate governance and accounting issues as they apply to and as

they may impact the health care industry specifically.

2

The importance of having congressional hearings on matters effecting the investing public cannot be over emphasized. Due in

large to the work of this committee, last year Congress passed and

President Bush signed into law historic corporate reform legislation, legislation that addressed many corporate governance and accounting matters that were first brought to the public’s attention

by our hearings.

While investigations by other branches of the government can

last months, even years, timely congressional hearings can result

in changes that benefit the public sooner rather than later.

With respect to the HealthSouth investigation, on March 19 of

this year the first of 15 former HealthSouth officers plead guilty to

a variety of Federal charges including conspiracy to commit wire

fraud, securities fraud, falsifying books and records, falsification of

financial information filed with the SEC, bank fraud and conspiracy to make false statements to auditors. Incredibly, all five of

the company’s chief financial officer spanning a period of over 15

years have plead guilty to a variety of these Federal offense. Guilty

pleas also have been obtained from several controllers and treasurers of the company.

The essence of the fraud was similar to those we have witnessed

in the past. It involved the use of inappropriate accounting practices to hide expenses and inflate revenues. All in an attempt to

meet Wall Street’s earnings expectations.

What is unique in this case is how the company’s senior officers

crafted an elaborate ruse to come clean with Wall Street about true

projected earnings once it became obvious that they would need to

do so by blaming a Medicare billing policy clarification on group

therapy reimbursement, known as Transmittal 1753, for an immediate and ongoing $175 million annual hit to its books.

The reality, as we will hear today, is that this policy clarification

would have little immediate impact and questionable long term impact on HealthSouth’s finances. The last man standing after this

wave of admissions and guilty pleas is the founder and former

chairman and CEO of the company Richard Scrushy. Notably,

every CFO as well as other senior officer of HealthSouth have stated under oath that Mr. Scrushy directed them to falsify

HealthSouth’s public financial statements.

Mr. Scrushy appears before this committee today voluntarily, but

has advised us that he will not testify and plans to assert his Fifth

Amendment right not to incriminate himself. This committee, as always, respects this assertion. However, I am deeply troubled by

this decision given that just 4 days before this hearing Mr. Scrushy

granted a no holes barred interview to ‘‘60 Minutes’’ without his attorney present. To agreed to answer the questions put to him by

a reporter, but now refuses to answer questions put to him by the

representatives of the investing public who lost so much money in

the almost total dissemination of HealthSouth’s stock last year.

This begs the question why is Mr. Scrushy unwilling to answer

here today under oath some of the same exact same questions

asked of him by a reporter? I also wanted to know why it is that

in the 3 months leading up to the company’s announcement of the

purported $175 million impact of Transmittal 1753, an announcement that sent HealthSouth’s stock plummeting and the company

3

to the brink of bankruptcy, Mr. Scrushy disposed of 75 percent of

his HealthSouth stock worth nearly $100 million? This fact is even

more suspicious given that Mr. Scrushy had not engaged in any

stock sales for the 5 preceding years.

Although we likely will not hear answers from Mr. Scrushy today

to these and other questions, we will hear from other witnesses

about the intimidating nature of the corporate environment and its

domineering chairman and how he made employees feel that if

they ever told him something he did not want to hear or pointed

out any internal problems, they would lose their jobs.

We will hear how Mr. Scrushy installed hidden cameras to keep

watch over his empire and had himself accompanied by an armed

bodyguard even while in his own company’s corporate office.

Several employees will tell us that one reason they did not use

the fraud hotline set up by HealthSouth and touted by Mr. Scrushy

as a way to report fraud allegations within the company, was that

they feared that the hotline was, in fact, monitored by

HealthSouth’s security and their identity could be uncovered.

We also will hear testimony from a witness who reported her

suspicion about fraud occurring at the company by senior management 3 years before the HealthSouth case broke. However, as the

committee has learned, the corporate compliance officer who took

charge of the investigation directed that the case be closed and no

paperwork substantiating any investigation that he did exists

today.

All of these matters raise distributing questions about the corporate culture established by Mr. Scrushy and the extent to which

the company under Mr. Scrushy’s leadership allowed its internal

controls and compliance efforts to be weak or nonexistent. They

also raise serious questions about the adequacy of efforts by

HealthSouth’s Board, it’s outside auditors and other extensible

independent actors to properly oversee this company and protect

the interests of investors, a subject for our next day of hearing into

this matter.

Following our hearing into the Enron scandal, this Congress

passed historic legislation to reform some of these corporate

abuses. To some degree we are already seeing the benefit of that

legislation in this case as the personal certifications of company

books now required by senior officers reported led one or more of

HealthSouth’s CFOs to think twice and go to the Justice Department instead. However, I cannot help but be amazed that even in

the post Enron environment HealthSouth’s corporate chiefs, board

members and outside experts would either participate in or fail to

properly undercover and stop such blatant accounting scams. How

could this have occurred? Certainly Mr. Scrushy had it at least partially right when he said on ‘‘60 Minutes’’ the other night that

there are incredible financial and other incentives for corporate

chiefs to cook the book because of promotions, raises, bonuses,

stock options and just plain old greed. If that is true, then we must

question whether any legislation will ever be sufficient to deter

such behavior.

Perhaps it comes down to the ethical and cultural climate fostered by those at the top of these companies, which is why it is so

appropriate to start this hearing with Mr. Scrushy himself.

4

I want to thank all of the witnesses for attending.

I now recognize the lady from Colorado, Ms. DeGette, for an

opening statement.

Ms. DEGETTE. Thank you, Mr. Chairman, for holding this very

important hearing on the fraud that nearly brought down the $4

billion HealthSouth Corporation.

This committee has developed an enviable record in exposing and

investigating fraud as some of the largest companies in this country, including Enron and WorldCom. In response to the scandals at

Enron and WorldCom, Congress passed the Sarbanes Oxley Act

which you referred to, which took a critical step in increasing accountability and cracking down on corporate malfeasance throughout corporate America. However, the revolutions of the culture of

deceit that pervaded HealthSouth and the countless measures

members of the management team took in order to create and to

protect their own fortunes reminds us that corporate reform is,

nevertheless, an issue that requires our immediate attention.

Simply, the deception that permeated HealthSouth from the

management team to the board of directors to the internal and external auditing teams is an absolute outrage. It is yet another sobering instance of the triumph of creed and arrogance over a company’s fiduciary duty to its shareholders. Accordingly, it’s incumbent upon us as a legislative body to send an unequivocal message

that such crookedness should not and will not be tolerated.

Unlike other cases that we’ve investigated in this subcommittee,

like Enron and WorldCom, the case of HealthSouth has some

unique characteristics. It’s often difficult to prove that a company’s

chairman and chief executive officer had personal knowledge of a

fraud. In this case however, as the chairman mentioned, 5 chief financial officers covering the period of HealthSouth’s creation in

1984 to March 2003 have plead guilty, and all of them have said

that Richard Scrushy, the company’s chief executive officer directed

them to make changes in the company’s financial books when the

company couldn’t meet Wall Street’s expectations; changes that allegedly amounted to nearly $3 billion.

Meanwhile, Mr. Scrushy claims he’s innocent but refuses to tell

this committee what he knows and what he doesn’t know, preferring I guess to go on national TV to say so. He claims that these

officers committed fraud, or at least he said on Sunday the officers

committed fraud to benefit themselves. But, of course, he neglected

to mention the biggest beneficiary of the fraud and other questionable practices of HealthSouth was Mr. Scrushy himself.

Our investigation has revealed a company with a breathtaking

lack of internal controls and one of the most negligent boards that

we’ve observed. The company was under the total control of Mr.

Scrushy with no countervailing corporate governance system in

place. By all accounts Mr. Scrushy ran HealthSouth by intimidation and manipulation. He refused to listen to top staff who told

him what he didn’t want to hear and punished them by taking

away responsibilities or playing staff members against each other.

One of the board members has said that no employee could stand

up against Mr. Scrushy without expecting pay back. As a result,

the compliance officer who could have stopped this fraud in 1999

5

failed to investigate credible allegations backed up by documentary

evidence which were actually admitted by the controller.

The chief financial officer instructed him to placate the complainant and the traditional internal controls were also missing. The internal auditors who reported directly to Mr. Scrushy by his orders

could not look at the corporate books. Ernst & Young, the external

auditor, which should have picked up on some of these weaknesses

never once found a single concern with the company’s accounting

practices or internal controls. I understand they’re coming in a few

weeks, and I’m looking forward to hearing them.

The HealthSouth board, stacked with personal friends of Mr.

Scrushy, was awash in conflicts of interests that benefits them financially and functioned as a rubber stamp for Mr. Scrushy.

For example, the board agreed to reprice stock options after they

were granted to benefit Mr. Scrushy and the officers.

The audit committee never met with the internal or external

auditor except to get perfunctory annual reports. The current internal auditor did not meet with the audit committee for the first 18

months of his tenure. The audit committee only met once in 2001.

These weaknesses allows Mr. Scrushy and others to use corporate funds to their own advantage. Mr. Scrushy had 7 corporate

planes. He wanted to be a music entrepreneur, so he spent a million dollars of HealthSouth’s money on Third Phase, a girl band

that he hoped would be the next Destiny’s Child.

The board approved a grant of 250,000 stock options to Tony

Mottola, then head of Sony Records, which subsequently signed

Third Phase to a record contract. But the board can’t even remember why they did it. And it goes on and on.

HealthSouth’s so called code of ethics requires that all potential

conflicts of interests be approved. According to the minutes provided to us, none of the conflicts were approved by the board. Some

of them, the board was not even aware of.

In every sense of the word HealthSouth failed the investing public in its employees. And, frankly, they are the ones who have paid

the highest price; the shareholders and the employees.

Mr. Chairman, thanks again for holding this hearing. I hope we

cannot only find out the corporate abuses with HealthSouth, but

also delve more into what we can do with accounting and auditing

firms, and the role of boards. Because I think those are two areas

ripe for legislation.

Mr. GREENWOOD. The Chair thanks the gentlelady and recognizes for purposes of an opening statement, the Chairman of the

full Committee, the gentleman from Louisiana, Mr. Tauzin.

Chairman TAUZIN. Thank you, Chairman Greenwood.

And let me first begin by saying how much the whole Committee

appreciates the hard work you and ranking Democrat Ms. DeGette

and the staff on both sides of the aisles have done on behalf of the

committee with respect to these corporate governance and accounting fraud cases.

This morning we begin our examination of the financial collapse

of HealthSouth. At its peak this company, reporting its operations

in 50 States and worldwide, was producing about $4 billion a year

in revenues. Today we know that figure was grossly inflated. And

we know these numbers were made up by cooking the HealthSouth

6

books over a multiple year period. In fact, currently the companies

forensic accountants indicate approximately $3 billion in fraudulent

accounting entries. That puts this fraud in the class of the

WorldCom fraud we looked at earlier.

Today we know, as the Chairman pointed out, the 15 former employees of the company, most of them senior management people,

have plead guilty to a range of criminal charges arising out of this

fraud.

We also know that, like some other cases we examined, the committee has learned that there was shredding of documents responsive to the SEC inquiry in this case, and to the Fulbright review

attempt in 2002 to examine one of the aspects of the case.

And we know that shredding occurred in a restricted area, a restricted access area in which the chairman, Mr. Scrushy and 4

other executive officers were located. We obviously don’t know yet

who did the shredding, but we know where it occurred in this restricted area and we know the shredding was, obviously, of documents responsive to these investigations and examinations.

So we have to ask once again how did such a vast conspiracy,

how could that have occurred in a Fortune 500 company which is

publicly trade and in which millions of Americans, many pension

holders, invest?

When people in this country make decisions about where to invest their hard dollars, when pension funds and others place their

sacred trust dollars into these businesses, everyone should be able

to rely upon established safeguards to ensure that the numbers

they are looking at are real. Those safeguards include internal controls, financial disclosures, corporate compliance programs, board

independence and external auditing. All to ensure that investors

can trust the numbers they are looking at. In the case of

HealthSouth and some of the other cases we have examined, these

safeguards resoundingly failed and Congress and the American

public have a right to know why.

It will be interesting, Mr. Chairman, to examine as we learn all

the fact in this case how the new statute that was passed by Congress would have changed, if it would have changed the results in

this case if this fraud would have been discovered early, if this

fraud could have been prevented. And from this examination we

may learn whether the act we passed can and will work as well as

we hope it will.

This examination is also relevant because we are in the middle

of a Medicare conference. We are examining a health care company, a health care company that made claims against CMS, the

agency that expends funds for Medicare and Medicaid, a system

that is hard pressed to satisfy the needs of Americans in terms of

maintaining and taking care of health problems in this country,

particularly for our seniors. And so this examination has relevance

on a number of different levels.

As a pointed out, we call the chairman of the board, Mr. Scrushy.

Our job is not to prosecute people here. Our job is to learn what

went wrong. To learn from it, and to establish policy to prevent it

in the future. But we are not going to learn a lot from Mr. Scrushy

today, other than what we have learned on ‘‘60 Minutes’’ while he

was willing to talk to ‘‘60 Minutes’’ reporters without the benefit

7

of an attorney, my understanding he will take the Fifth this morning. And while we certainly respect the rights afford to him under

the Constitution to refuse to incriminate himself, we really question why he felt it was appropriate to discuss this story to a television journalist when he is unwilling to do so before Congress

today.

We look forward to hearing the testimony of current and former

employees of the company who, in fact, raised concerns about irregularities that they observed during the period of the fraud, only to

be punished or berated for bringing it to the attention of officers

of the company. Have we heard that before in some of these investigations?

Let me also thank you all for coming to testify today. If management had listened to your concerns when you brought them up several years ago, maybe HealthSouth would not have been forced to

the brink of bankruptcy. An important company that delivers important health care services to Americans would not have been put

in such an awful position.

We will hear from former members of the management team and

employees who were integrally involved in the company’s internal

control and compliance activities. Perhaps they can shed some light

on why these processes failed so dramatically and whether or not

the new Sarbanes Oxley Bill will help cure those problems.

This committee has been examining these HealthSouth issues for

6 months. And, again, I want to thank you all for the extraordinary

hard work you have done, Mr. Chairman and Ms. DeGette, and the

members of your staff. But as you know, we have been looking at

these kind of problems in various sectors of the economy that fall

under this Committee’s jurisdiction. Enron in the energy sector,

WorldCom, Global Crossing, Qwest in the telecom sector. ImClone

and now HealthSouth in the health care sector. In each of these

cases we have pursued these investigations because of the transparency, the accuracy, the credibility of financial statements are

simply essential to the smooth functioning of competitive markets.

And they’re absolutely critical to instill the requisite confidence in

the investing public necessary to support our capital system.

Thankfully, perhaps as a result of the hearings we have held, perhaps as a result of the Sarbanes Oxley Bill, perhaps as a result of

the extraordinary changes that are occurring in board rooms across

America, Americans are beginning to feel some confidence again in

the marketplace.

Today we take one more step in ensuring the problems that occurred at HealthSouth and the damage done to the investing public, to the workers who tried to build a great company only to find

that their leadership in the company let them down; we take one

more step in establishing and reestablishing confidence of Americans and investors in this marketplace.

We have got a lot of ground to cover, so Mr. Chairman, I will

yield back the balance of my time.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes for the purposes of an opening statement the vice chairman

of the subcommittee, the gentleman from Oregon, Mr. Walden.

8

Mr. WALDEN. Thank you very much, Mr. Chairman. And thank

you for convening this hearing, the first in a series that examines

the collapse of HealthSouth.

A year and a half ago Congress passed laws in the wake of the

frauds and tumultuous bankruptcies of Enron and Global Crossing

to protect workers and investors in publicly traded corporations by

improving the accuracy of corporate financial disclosures and increasing supervision of accountants that audit public companies. As

a result, the Securities and Exchange Commission has set standards to ensure that corporate financial disclosures are complete,

transparent and provide an accurate picture of a company’s financial health. I question if HealthSouth heeded any of the methodologies that Congress established to check and balance the financial

underpinnings of publicly trade corporations.

I am troubled by charges included in the complaint filed in the

U.S. District Court of the Northern Alabama by the SEC that

claims that between 1999 and 2002 when HealthSouth’s earnings

fell short of Wall Street’s earnings estimates, Mr. Scrushy, CEO of

HealthSouth, directed accounting personnel to ‘‘fix it’’ by artificially

inflating the company’s earnings to match Wall Street’s expectations. This type of alleged fraud is exactly what Congress is attempting to root out when we passed the landmark Sarbanes Oxley

Corporate Accountability Act. Was anyone accountable at

HealthSouth under Mr. Scrushy’s leadership?

As long as corporate executives feel they are above the law and

not accountable to each and every shareholder, Congress will hold

them accountable for their actions or inactions. Reforming accounting oversight and enhancing corporate disclosure are critical to increasing and maintaining investor confidence in our Nation’s corporations. Without this confidence, private investment will plummet and our economy will suffer.

The ‘‘60 Minutes’’ piece that aired on Sunday night told a story

of a night that had a vision and worked tirelessly to make his vision a reality. He built a health care empire that provided rehabilitative care to patients coast to coast and employed tens of thousands. That company, HealthSouth, would still be a struggling

small business scraping capital together if it were not for the confidence that investors and shareholders afford Richard Scrushy in

the mid 1980’s when HealthSouth began to be publicly traded.

Each time an Enron, WorldCom, Global Crossing or HealthSouth

scandal surfaces investor confidence is severely eroded. Without investor confidence, the free enterprise system falters. This sets of a

domino effect throughout our economy.

It is extraordinary to me that this company paid more to Ernst

& Young to check its trash cans and toilets than it paid to audit

its books and its revenues and expenditures. It is absolutely outrages.

One of my colleagues mentioned that there was a breathtaking

lacking of internal control. And, indeed, from a normal sense of

business practice that is true. But it begins to look like there was

an extraordinary system of internal control right at the top that

prevented internal auditors from accessing the books and records

they needed to access. There is a total failure here in how this comVerDate 11-MAY-2000 10:25 Jan 13, 2004 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 89963.TXT HCOM1 PsN: HCOM1
9

pany was reviewed, audited and the information that flowed out to

investors.

I spent 5 years on a community bank board and served on an

audit committee. I am outraged at the practices that I read about

that took place here. It’s unexcusable, it’s unacceptable, it will not

be tolerated.

Mr. Chairman, I yield back the balance of my time.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes for an opening statement the gentleman from North Carolina,

Mr. Burr.

Mr. BURR. Thank you, Mr. Chairman.

Mr. Chairman, this has become too much of a commonplace thing

for this Committee that we have a piece of corporate America in

front of the Oversight Committee. Because of the fact that they let

down the trust of their investors, their employees, that there potentially was fraud. I would remind everybody, we are not a court. We

have a very important role to play, and it is why I think this hearing is going on.

We have a policy mission as it relates to Medicare and Medicaid

that a lot of times people do not believe that our eyes are on the

right thing. To understand it in total it means that you have to

look at everything that has an effect on it. Fraud within that system has a huge effect. It is very appropriate for this Committee to

look at this issue, and to look at it in whatever detail helps us to

understand what happened, why it happened. Because our challenge is to make sure that we design a system that does not allow

it to happen, whether it is this company or another company, or

another entity in the future.

Clearly there is a legal process that those that need to go

through will go through. But I hope that those that are here today

understand that this committee through this subcommittee are focused on the changes, if any, that we need to make to make sure

that in the future this cannot happen. Not that it does not. We understand that individual creed maybe does drive people to do

things that they know are wrong. It does not mean that we have

to create a system or allow one to stay in place that makes it easy

for them to make that decision.

So I do appreciate the Chairman’s willingness to do this, and I

know this will not be the last time that we are forced to have a

hearing in Oversight that does this, but I do thank the Chairman.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes for an opening statement the gentleman from New Jersey,

Mr. Ferguson.

Mr. FERGUSON. Thank you, Mr. Chairman. Thank you for holding this important hearing on the massive and comprehensive

fraud perpetrated by executives at HealthSouth.

First of all, we have to remember and think of the people at the

FBI and the SEC, and the Department of Justice. They should be

commended for their diligence in pursuing this matter and helping

uncover the deceptive and illegal scheme that is simply business as

usual for the executive team at HealthSouth.

Listen to the words that the FBI and the U.S. Attorney have

used to describe the criminal HealthSouth’s activities. ‘‘Securities

fraud, tax fraud, bank fraud, accounting fraud, wire fraud, criminal

10

conspiracy.’’ Clearly the authorities must continue their hard work

until justice is served for all those who are guilty of deceptive and

unlawful business practices.

Mr. Chairman, as you have noted, 15 people have already plead

guilty in this case. These are 15 seemingly everyday people who

have been branded as felons and will spend time in jail, possibly,

for their criminal actions. At HealthSouth it was the culture from

top to bottom to carry out this fraudulent scheme with the executive team.

As a U.S. Attorney said in a recent press release, ‘‘HealthSouth

does not represent a mere accounting fraud, but rather a business

scheme to fraudulent boost HealthSouth’s reported earnings.’’ The

U.S. Attorney continued ‘‘HealthSouth executives concealed the

scheme to fraudulently inflate earnings from the investing public,

the auditors and government regulators and willfully and knowingly made false and misleading statements to auditors and omitted material facts in order to mislead their accountants’’—even

misleading their accountants—‘‘in connection with an audit of

HealthSouth’s financial statement.’’

I am interested to hear how such a massive and comprehensive

fraud could have been orchestrated. Unfortunately, we will not be

hearing, seemingly, from the captain of the ship at HealthSouth.

Many have suggested that Mr. Scrushy, founder and former CEO

of the company, initiated and masterminded this fraud. We may

not get any answers from Mr. Scrushy today, but we will learn a

great deal about the fraud at HealthSouth.

But if there is one thing that I hope that we will learn from this

hearing, and all America will learn from this hearing, is that those

who run America’s companies will continue to get the message;

that if you are committing fraud, you will be caught and there will

be a dear price to pay.

Thank you, Mr. Chairman. I look forward to hearing from our

witnesses, and I yield back.

Mr. GREENWOOD. The Chair thanks gentleman and recognizes for

his opening statement the gentleman from Florida, Mr. Stearns.

Mr. STEARNS. Good morning. And thank you, Mr. Chairman, for

holding this subcommittee hearing.

Now here we go again. We have been through this with other

companies, and obviously it’s disheartening to see that this committee has to continue to investigate corporate malfeasance and

whether this financial fraud is committed by accounting firms, like

Arther Anderson, or energy companies or conglomerates, it is all

disappointing again this morning to be here.

There is a branch of HealthSouth chain in my hometown of

Ocala, Florida. My constituents have used it for years and families

in Ocala and throughout central Florida depend upon the jobs

there.

HealthSouth had its executives come into my office here in

Washington to lobby me and my staff. One of the concerns they

had were they want a more lucrative classification dealing with

Medicare reimbursement for therapy, the 75 percent rule so called.

And they wanted to make themselves more available for this. And

one of their arguments was they needed it for their bottom line.

11

It is not wrong to lobby me, obviously. But myself and my staff

trust that when they come in and to make their arguments in their

presentation about their finances for their firm that they are accurate. Issues like the senior Transmittal 1753, which deals with it.

And then to see to Mr. Scrushy’s mysterious stock option sale, you

know, 3 days prior to that memo casts doubt on that trust.

Mr. Chairman, the Department of Defense put up the 52 most

wanted people in Iraq. My colleagues, there are now two websites

that have come up with the most wanted executives. One of them

is called Shareholders Most Wanted The Original Greedy Executive

Card Deck. And they show a royal flush here including Ken Lay

and others.

Mr. Scrushy, I would think that you will be added to this Shareholders Most Wanted list, The Original Greedy Executive so we can

see here a royal flush. You will probably replace even some of the

people on this list.

There is another, Stacked Deck, Corporate America’s Least

Wanted, the original scandal list. It’s a parody. It’s a good card set.

It includes companies as well as individuals.

So, Mr. Chairman, we can see that the public is starting to perceive, and that is why we are here.

Let me follow up a little bit on what my colleague from North

Carolina, Mr. Burr, indicated.

I was asked, well, why is this Committee investing? Why do you

not just send all this information to the Justice Department or the

FTC, or the SEC, why are you spending your time here?

Well, we write the laws, and we write the laws on Medicare reimbursement and security trading, and therefore we need to be informed when these events do not proceed according to the law that

we passed. And that is why we are here today. We have a fiduciary

responsibility to taxpayers to understand it so we can write the

laws better.

So once again the committee will again examine the issues of falsified accounting records, inflated share prices, the role of executive

compensation and the protection of corporate and courageous whistleblowers. Besides jeopardizing patients and employees, shady executives’ practices lead to damaging effects that ripple through this

economy. Do not give the shareholders the confidence they need to

invest.

My colleagues, Mr. Chairman, integrity is the elixir that attracts

capital, bottom line. It leads to lifesaving treatment. While deceit

is a poison that erodes investor confidence and hurts employees

and possible patients.

So I look forward to the testimony, Mr. Chairman, this morning.

And I, again, compliment you on this hearing.

Mr. GREENWOOD. The Chair thanks the gentleman.

If there are no additional opening statements, at this time the

Chair will call forward our first witness, Mr. Richard Scrushy,

former Chairman and CEO of HealthSouth.

Mr. Scrushy, please come forward and be seated at the table.

Good morning, sir.

Given that you have indicated through your counsel that you will

not answer the subcommittee’s questions today, I want to show you

and the subcommittee members some excerpts from your appearVerDate 11-MAY-2000 10:25 Jan 13, 2004 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 89963.TXT HCOM1 PsN: HCOM1
12

ance on ‘‘60 Minutes’’ last Sunday night, an interview that your

own lawyers have said in a letter to this subcommittee should

‘‘serve any immediate public need for information from you.’’

So will the staff please start the video.

Mr. WALLACE. You are supposed to be a crook. The SEC in effect

says you are. Your former financial officers, chief financial officers

say you are, that Richard Scrushy inflated earnings and betrayed

his stockholders, betrayed his employees.

Mr. SCRUSHY. There is no evidence of any of that. And mainly

what the people have said is not true.

Mr. WALLACE. He told us his top financial officers committed the

fraud without his knowledge.

Mr. SCRUSHY. You have to rely, you have to trust people. You

have to believe—you have to delegate. I mean, you hire you them,

you pay them good salaries, you expect them to do the right thing.

And I signed off on the information based on what was provided

to me and what I was told.

Mr. WALLACE. You say you did not keep track of the accounting?

Mr. SCRUSHY. CEO’s do not do that. CFOs do that.

Mr. WALLACE. Who is that?

Mr. SCRUSHY. Chief financial officer means he is the chief financial officer.

Mr. WALLACE. Here is how the SEC describes what it calls the

scheme, your scheme. Each quarter HealthSouth senior officers

would present Scrushy with the company’s actual earnings and he

would compare them to Wall Street expectations. If the actual results fell short of expectations, Scrushy would tell his management

to ‘‘fix it’’ by recording false earnings to make up for the shortfall.

Mr. SCRUSHY. That is not true.

Mr. WALLACE. Scrushy’s world first began to become apart last

March when one of his chief financial officers went to Federal prosecutors and confessed that HealthSouth at Scrushy’s expressed direction had been overstating its profits hugely for years. So far, 15

former HealthSouth employees have plead guilty.

Michael Martin, Chief Financial Officer. Let me read from the

court transcript when he plead guilty. The judge asked Michael

Martin ‘‘Did you Mr. Scrushy discuss in fact the numbers contained

in the filings were false?’’ ‘‘Yes, sir.’’

‘‘Did Mr. Scrushy direct you to do something with the number?’’

‘‘Yes, sir. He told me to inflate the numbers. To fix the numbers

so that they met Wall Street’s expectations.’’

Mr. SCRUSHY. So is Mike Martin just a dummy? Just some guy

says go do something to commit a fraud or a crime that would put

you in jail, and Mike Martin just does it? You don’t believe that,

Mike.

I would never have done that. He is not telling the truth.

Mr. WALLACE. Tad McVay, CFO until early this year, 2003, plead

guilty told the judge Richard Scrushy was aware that the financial

statement contained numbers that were incorrect.

Mr. SCRUSHY. This is—again, it is not true.

I have an—I have——

Mr. WALLACE. All these guys are liars and you are a knight in

shining armor?

13

Mr. SCRUSHY. Mike, there are 50,000 people; there are 5—you

know, 5 people that have made these claims out of 50,000. Let me

make a comment.

Mr. WALLACE. But you are in charge. Come on, you are——

Mr. SCRUSHY. It does not mean—it does not mean I am a—no,

I did not—I did not—no. This—you are not right.

Mr. WALLACE. McVay told the judge you tried to justify it by saying ‘‘all companies play games with accounting.’’

Mr. SCRUSHY. I never said that to him, and he knows that.

Mr. WALLACE. Why would these chief financial officers, what you

are saying is they committed the fraud? For what reason?

Mr. SCRUSHY. I did not—I certainly did not commit the fraud.

People know me. They know I would not instruct somebody to do

that.

Mr. WALLACE. What would be the motive of your CFOs to commit a fraud?

Mr. SCRUSHY. I really do not want to get into it with you. But

every one of them has a motive.

Mr. WALLACE. But then he did tell us what he believes motivated

his CFOs to falsely inflate earnings.

Mr. SCRUSHY. Promotions, bonuses, stock, stock options, an opportunity to make a lot of money. There is incentives in it. Tremendous incentives: Power, greed. There is a lot of reasons for what

they did. There is no motive for me to destroy a great company that

I built, a company that I loved, my fourth child. There is no reason

for me to do that.

Mr. JONES. He benefited more than anybody from this fraud.

There is no question about it, 100 times fold.

Mr. WALLACE. Doug Jones, a former U.S. Attorney in Birmingham has filed a class action suit against Scrushy on behalf of

stockholders who lost billions while Scrushy made hundreds of millions dollars from the fraud. How?

Mr. JONES. In his stock options, his salaries and his bonuses.

And he has for years cultivated an image that this is my company.

I am the one that brought this company up. I had my finger on the

pulse. I know everything that is going on in this company. I know

the numbers. I know all that, I know all that he told me, but I am

not an accountant. He does not have to be an accountant to direct

this fraud. Other people may be the ones sitting up there late at

night crunching the numbers and cooking the books. But that does

not mean when he says fix it, if that is true that he’s not as much

responsible for engineering that train wreck as anybody else.

Mr. WALLACE. When the public sees a report in The Wall Street

Journal and HealthSouth says hey, things look very, very good for

the next quarter or the next year or whatever, and then people

would be buying the stock and conceivably driving up the price of

the stock, right?

Mr. SCRUSHY. That is right.

Mr. WALLACE. It’s suggested that that was the motive for you to

inflate these figures because you were living high, you wanted to

that stock to be high and that is, apparently, what people are saying is the motive for you to phony up the figures.

Mr. SCRUSHY. Well, I didn’t phony—first of all, I did not phony

up the figures.

14

Second of all, you got to look at my—my buying and selling,

okay?

Mr. WALLACE. Yes.

Mr. SCRUSHY. I did not sell the stock at a high.

Mr. WALLACE. The stock is now $3.

Mr. SCRUSHY. Yes.

Mr. WALLACE. You sold $99 million worth of that stock between

$10 and $14.

Mr. SCRUSHY. When you build something from nothing, you

should have the right at some point to have some liquidity. That

is what every young MBA in America is working toward.

So what I did was, you know, the American dream.

Mr. WALLACE. But you get out?

Mr. SCRUSHY. I did not—no, I didn’t—I just got some of it out.

I did not—I just——

Mr. WALLACE. You got a lot of it out, $99 million worth.

Mr. SCRUSHY. Yes. But I am saying——

Mr. WALLACE. $99 million worth between $10 and $14, and all

of these other poor people, what are they doing?

Mr. SCRUSHY. Right. Right.

Mr. WALLACE. They are sitting there waiting because they do not

know what you know.

Mr. SCRUSHY. Mike? Mike? Mike, I had stock options that were

going to go away, $99 million worth going away. It was going away.

It was done.

Mr. WALLACE. Right.

Mr. SCRUSHY. I was going to lose it. What would you have done?

What would anybody have done?

Mr. WALLACE. What he did was sell high, and to help keep it

high he regularly gave bullish profit predictions to Wall Street analysts and interviewers.

Here is what he said on CNBC last year when the stock was selling at $15.

Mr. SCRUSHY. Well, I think the companies should be offering $20

a share right now. Certainly we should be higher than we are now,

but I would expect to see the company in the $20’s, and that is

where we are headed, we believed.

Mr. WALLACE. But just 12 days later Scrushy sold more than 5

million shares of his stock. Now HealthSouth board is barred him

from even entering any offices of the company he built and

HealthSouth now admits that none of his past profit numbers can

be trusted. The company is struggling to stay out of bankruptcy

and Scrushy is struggling to stay out of prison.

You would expect, I would imagine, the U.S. Attorney here in

Birmingham within what? Weeks to bring criminal charges against

you?

Mr. SCRUSHY. I do not expect that at all. I think an objective review of the evidence will show that Richard Scrushy was not involved in any of these alleged crimes. And they will see that I was

not part of that scheme.

Mr. WALLACE. Scrushy still lives an over-the-top millionaire’s

life, though now that his fate will probably be decided by a jury in

Birmingham, he wants to downplay his wealth. He would not let

15

us videotape his 4 mansions, nor his antique car collection, nor his

wine cellar.

I have seldom been in this position before, to talk to a man of

great accomplishments who maybe or maybe not went wrong and

who sits here and says the SEC is wrong, the prosecutors are

wrong, the chief financial officers are wrong, the world is against

me. They are all wrong and I am right. I am an honorable man and

they are just damn wrong.

Mr. SCRUSHY. Why do we not take the testimony of people who

are not felons, who are admitted liars and see what they have to

say. Let us get their testimony. They will not say the same thing.

Mr. WALLACE. You are not going to jail?

Mr. SCRUSHY. No. No, I am not going to jail. I am an innocent

man. I am not going to jail.

Mr. GREENWOOD. Mr. Scrushy, here is your opportunity to say

under oath what you said on ‘‘60 Minutes’’. Here is your opportunity to answer questions and tell this Committee of Congress

what we need to know about HealthSouth under oath.

As you know, when we conduct an investigative hearing this

Committee has the practice of taking testimony under oath. Do you

have any objection to doing so?

You have to put your microphone on, Mr. Scrushy. There is a little button there.

Mr. SCRUSHY. Is that one?

Mr. GREENWOOD. It is on.

Mr. SCRUSHY. Mr. Chairman, I would like to state my position

if it is——

Mr. GREENWOOD. Well, first, then in that case do you object to

giving your testimony under oath? We take testimony under oath

here.

Mr. SCRUSHY. Mr. Chairman, I am—I am going to state my—I

mean I am going to invoke the Fifth, but I would like to state my

position on that.

Mr. GREENWOOD. In that case, would you stand and raise your

right hand? You have to be sworn in before you say you state your

position. You can say anything you want for as long as you want

this morning, and we would love it if you would, but the first thing

you need to do is stand and raise your right hand so I can place

you under oath.

In case your lawyers are not making this clear for you, I will.

If you wish to take the Fifth, assert your Fifth Amendment

rights, you may do so. But the first thing you do, even before you

assert those rights——

Mr. SCRUSHY. Yes, sir.

Mr. GREENWOOD. [continuing] is you need to be sworn in.

Mr. SCRUSHY. I understand.

Mr. GREENWOOD. Do you have any objections to——

Mr. SCRUSHY. No, sir.

Mr. GREENWOOD. Okay. Then would you please stand and raise

your right hand?

[Witness sworn.]

Mr. GREENWOOD. Okay. You are now under oath. And under the

rules of the House you are also advised that you have the right to

be advised by counsel as to your constitutional rights. Could you

16

please state for the record the names of the counsel who are here

today to advise you with respect to such matters?

Mr. SCRUSHY. Donald Watkins and Jonathan Wills.

Mr. GREENWOOD. Okay. The Chair now recognizes you for the

purpose of making an opening statement, if you so desire. Do you

desire to make an opening statement, sir?

Mr. SCRUSHY. Yes, sir, I do.

Mr. GREENWOOD. You may proceed.

TESTIMONY OF RICHARD SCRUSHY, FORMER CHAIRMAN AND

CEO HEALTHSOUTH

Mr. SCRUSHY. Thank you, Mr. Chairman.

Mr. Chairman and members of the subcommittee, thank you for

the opportunity to appear here today.

Since the committee first wrote me, I asked my counsel to try to

arrange for a fair hearing where I could tell the truth about the

charges which have been made concerning me and HealthSouth.

‘‘60 Minutes’’ gave me such an opportunity in the media. I had

hoped that the committee today at this hearing would ask my accusers to make their charges against me under oath, then I could

answer them under oath. But the committee has not called any of

my accusers to testify today.

The committee wants me to answer charges without facing my

accusers. I do not believe this is fair. I am, therefore, by advice of

my counsel forced to take the Fifth Amendment today until I can

get a venue where I can face my accusers.

I hope the committee will let me come back someday under more

appropriate circumstances to testify fully about the HealthSouth

success story. By then, it will know more of the true facts. It will

also know that there is not, and has never been any financial collapse of HealthSouth.

The only collapse has been the temporary one in the

HealthSouth stock price caused by the manner in which this matter was investigated last March and the excess media publicity

generated.

Thank you, Mr. Chairman.

Mr. GREENWOOD. Thank you, Mr. Scrushy.

The Chair would note, Mr. Scrushy, that during your ‘‘60 Minutes’’, which I watched with my mother and father in their home

Sunday evening, your accusers were not there. You faced a series

of questions from a reporter and you openly—apparently openly

asked those questions. So the only difference that we can see between then and now is that you are now under oath.

So I am going to ask you one of the questions that Mr. Wallace

asked you about former HealthSouth CFO Mike Martin’s guilty

plea transcript in which Martin says that he discussed with you

the fact that the numbers contained in the HealthSouth filing were

false and that you told him to inflate the numbers, to fix the numbers so that they met Wall Street’s expectations. Your response

Sunday night was ‘‘I would never have done that. He is not telling

the truth.’’ Mr. Scrushy, why do you not tell us the truth?

Mr. SCRUSHY. Under the advice of counsel, Mr. Chairman, I invoke the Fifth Amendment.

17

Mr. GREENWOOD. Did you discuss with Mr. Martin the fact that

the numbers contained in HealthSouth’s filings were false and did

you direct Martin to inflate the numbers or fix them to meet Wall

Street’s expectations?

Mr. SCRUSHY. I invoke the Fifth, Mr. Chairman.

Mr. GREENWOOD. Well I am a little confused, Mr. Scrushy. If

what you told the American public Sunday night was in fact the

truth, why don’t you simply repeat those denials here today under

oath?

Mr. SCRUSHY. Mr. Chairman, I have stated my position and my

reason for invoking the Fifth.

Mr. GREENWOOD. Let us try another one. Mike Wallace asked

you about former CFO McVay’s plea transcript in which he said

that you were aware that the financial statement contained numbers that were incorrect. Your response on Sunday night was ‘‘It

is not true.’’ That sounds definitive, emphatic. So let me ask you

the same question here today under oath, Mr. Scrushy. Were you

aware that the financial statement contained numbers that were

incorrect?

Mr. SCRUSHY. As previously stated, Mr. Chairman, I invoke the

Fifth.

Mr. GREENWOOD. Mr. McVay told the judge you tried to justify

it by saying ‘‘all companies play games with accounting.’’ When

Mike Wallace asked you about this on Sunday night you said ‘‘I

never said that to him, and he knows that.’’

Mr. Scrushy, did you tell Mr. McVay that ‘‘all companies play

games with accounting’’?

Mr. SCRUSHY. Again, Mr. Chairman, I invoke the Fifth Amendment.

Mr. GREENWOOD. Well, since you do not seem to want to answer

Mike Wallace’s questions here today under oath, let me ask a few

of my own.

You told ‘‘60 Minutes’’ that your CFOs who have plead guilty had

plenty of incentive to falsify the numbers because of bonuses and

stock options, yet is it not true, Mr. Scrushy, that you were one of

the only employees at HealthSouth, if not the only employee, to

have an employment agreement with large financial bonuses directly tied to monthly and annual revenue targets? And if you

would like to, you could turn to Tab 22 in the binder in front of

you if you would like to refer to that agreement.

Mr. SCRUSHY. On advice of counsel, Mr. Chairman, I invoke my

Fifth Amendment rights.

Mr. GREENWOOD. All right. Well, let us try one last question.

Mike Wallace asked you about your sale of $99 million worth of

HealthSouth stock just before the bad news hit and the bottom

dropped out. Comparing your position to those of average investors

who got taken to the cleaners, he said to you ‘‘But you got out.’’

Your response was ‘‘I did not get—no, I did not get—I just got some

of it out.’’ Mr. Wallace replied ‘‘You got a lot of it out.’’ To which

you replied ‘‘No.’’

Mr. Scrushy, the committee found a copy of an analysis by

HealthSouth’s own attorneys showing that you sold off 75 percent

of your HealthSouth stock at that time. Was it not just a bit disVerDate 11-MAY-2000 10:25 Jan 13, 2004 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 89963.TXT HCOM1 PsN: HCOM1
18

ingenuous when you told Mike Wallace that you just got some of

it out?

Mr. SCRUSHY. On advice of counsel, Mr. Chairman, I invoke the

Fifth Amendment rights.

Mr. GREENWOOD. The Chair yields to Mr. Stearns for the purpose

of questioning.

Mr. STEARNS. Thank you, Mr. Chairman.

You have gone, based upon Mike Wallace’s interview, you went

and indicated to Mr. Scrushy you want an answer to two or three

of those questions that Mike Wallace posed.

I have a question for you, Mr. Scrushy. Did everything that you

said in that ‘‘60 Minute’’ interview with Mike Wallace represent the

whole truth and nothing but the truth?

Mr. SCRUSHY. Sir, as I said earlier, on advice of counsel I am

going to have to take the Fifth Amendment.

Mr. STEARNS. Okay. The last thing you said in that interview,

you said I am an innocent man. I am asking you today are you an

innocent man? Can you say yes without taking the Fifth?

The question is very simple. Are you an innocent man, yes or no?

Mr. SCRUSHY. Mr. Chair—I mean, sir, based on as I said earlier

in my statement and advice of counsel, I stand on my statement.

Mr. STEARNS. I respect that. But I am just saying that you made

a statement you’re an innocent man. You have an opportunity just

to answer that question. You do not need to take the Fifth just to

say by gosh I am an innocent man. You are saying it to yourself,

your family and everybody. You are standing by what you said in

your opening statement. So it seems like you could say yes, I am

an innocent man.

Mr. SCRUSHY. As you know, sir, I—I would love to answer all of

these questions——

Mr. STEARNS. It is just——

Mr. SCRUSHY. And I look forward to the day that I get that

chance. But on advice of counsel during this session I will take the

Fifth Amendment on every question. I will stand on my statement.

Mr. STEARNS. Mr. Chairman, thank you.

Mr. GREENWOOD. The Chair yields to the gentlelady from Colorado, Ms. DeGette.

Ms. DEGETTE. Thank you, Mr. Chairman.

Mr. Scrushy, with all due respect, it seems to me that you want

it both ways. You want to be able to go in front of a national TV

audience and give your story without having to answer questions

under oath. Then you want to come into today and make a statement, a self-serving statement in my view, and then when we ask

you questions you want to take the Fifth Amendment when we ask

you questions under oath.

And, Mr. Chairman, it seems to me that Mr. Scrushy may well

have waived his right to take the Fifth in front of this Committee

by coming in under oath and making an opening statement that

deals with the substance of the investigation before answering

questions. And so I would respectfully request the committee to

refer this issue to the House General Counsel for a legal opinion

as to whether he has indeed waived his Fifth Amendment right.

And if he has, Mr. Chairman, I would ask that the committee reVerDate 11-MAY-2000 10:25 Jan 13, 2004 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 89963.TXT HCOM1 PsN: HCOM1
19

serve the right to recall Mr. Scrushy to answer this committee’s

questions under oath.

Mr. GREENWOOD. The Chair will take the gentlelady’s request

under consideration.

Mr. Scrushy, let me be clear, are you refusing, as it seems that

you are, to answer all of the questions on the right against self-incrimination to you under the Fifth Amendment of the U.S. Constitution?

Mr. SCRUSHY. Yes, I am.

Mr. GREENWOOD. Okay. Given that there are no further—and is

it your intention to assert such right in response to all further

questions from the subcommittee today?

Mr. SCRUSHY. Yes, sir.

Mr. GREENWOOD. Okay. Given that, if there are no further questions from the members, I will dismiss you at this time subject to

the right of the subcommittee to recall if necessary.

Mr. Scrushy, when the day comes that you’re prepared to come

to this Committee and testify under oath, have your lawyers call

our lawyers. We would love nothing more than to give you that opportunity. But, for the moment, sir, you are excused.

Mr. SCRUSHY. Yes, sir. We will be happy to do that. Thank you.

Mr. GREENWOOD. At this time the Chair will call forward our second witness, Ms. Susan Jones-Smith, former Senior Vice President

of Finance and Reimbursement of HealthSouth.

Ms. Jones-Smith, please come forward and be seated at the table.

Good morning.

TESTIMONY OF SUSAN JONES-SMITH, FORMER VICE PRESIDENT OF FINANCE AND REIMBURSEMENT OF

HEALTHSOUTH

Ms. JONES-SMITH. Hello.

Mr. GREENWOOD. As you know, when conducting an investigative

hearing, this Committee has the practice of taking testimony under

oath. Do you have any objection to doing so?

Ms. JONES-SMITH. No.

Mr. GREENWOOD. Okay. In that case, would you stand and raise

your right hand.

[Witness sworn.]

Mr. GREENWOOD. You can be seated.

Under the rules of the House and this Committee you have the

right to be advised by counsel as to your constitutional rights. Can

you please state for the record the name of the counsel is here

today to advise you with respect to such matters?

Ms. JONES-SMITH. David McKnight.

Mr. GREENWOOD. That is the gentleman to your right?

Ms. JONES-SMITH. Yes.

Mr. GREENWOOD. Thank you.

The Chair recognizes the witness for purposes of making an

opening statement, if you so desire. Do you desire to make an opening statement this morning?

Ms. JONES-SMITH. I have no opening statement.

Mr. GREENWOOD. Okay. In that case, the Chair now recognizes

himself for 10 minutes for purposes of questioning the witness, and

I yield 5 minutes to Mr. Walden from Oregon.

20

Mr. WALDEN. Thank you, Mr. Chairman.

Ms. Jones-Smith, the SEC has alleged that every quarter for a

period of at least 5 years senior officers at HealthSouth would meet

to discuss how to ‘‘fill the gap’’ between HealthSouth’s actual revenues and Wall Street’s expected earnings of the company. My question is did you participate in or have knowledge about these meetings in which HealthSouth officers determined how they were going

to falsify HealthSouth’s earnings?

Ms. JONES-SMITH. Upon advice of counsel, I respectfully decline

to answer based on my Fifth Amendment privilege.

Mr. WALDEN. Ms. Jones-Smith, let me be clear. Are you refusing

to answer the question on the right against self-incrimination afforded to you under the Fifth Amendment of the U.S. Constitution?

Ms. JONES-SMITH. Upon advice of counsel, I respectfully decline

to answer based upon my Fifth Amendment rights.

Mr. WALDEN. And is it your intention to assert such right in response to all further questions from the subcommittee today?

Ms. JONES-SMITH. Yes, sir.

Mr. WALDEN. Given that, Mr. Chairman, I would recommend

that this subcommittee dismiss this witness at this time.

Mr. GREENWOOD. If there are no further questions from the

members, I will dismiss you at this time subject to the right of the

subcommittee to recall you if necessary. And we thank you for

being with us this morning.

You are excused.

The Chair calls forward our next panel of witnesses. And they

are, Ms. Diana Henze, Assistant Controller, HealthSouth Corporation; Ms. Teresa Sanders, former Group Vice President and Chief

Auditing Officer of HealthSouth Corporation; Mr. Steve Schlatter,

former HealthSouth Physical Therapist; Mr. Michael Vines, former

HealthSouth employee in Corporate Fixed Assets Department; Mr.

Martin Cohen, Senior Managing Director, FTI Consulting; Ms.

Kelly Cullison, former Vice President of Compliance HealthSouth

Corporation; Mr. Greg Smith, Chief Auditing Officer of

HealthSouth Corporation.

Good morning, ladies and gentlemen, and we thank you very

much for volunteering to come and testify at our hearing this

morning.

As you heard me say to the previous witnesses, it is the practice

of this subcommittee to take testimony under oath. And so I need

to ask you if any of you object to giving your testimony under oath?

Okay.

And I also should advise you that pursuant to the rules of the

House and this Committee you are entitled to be represented by

counsel. Do any of you wish to be represented by counsel this

morning?

Yes, sir, Mr. Cohen? You need to bring the microphone up to you

and make sure that it is on. Push the button. There you go.

Mr. COHEN. Represented by Phillip Evans.

Mr. GREENWOOD. Okay. And he’s the gentleman directly behind

you?

Mr. COHEN. Yes, sir.

Mr. GREENWOOD. Anyone else chose to be represented by counsel? Ms. Cullison?

21

Ms. CULLISON. Yes. John Robbins is seated behind me.

Mr. GREENWOOD. Yes. Thank you.

Mr. Smith?

Mr. SMITH. Mr. Michael Dyer.

Mr. GREENWOOD. Okay. Very well.

Ms. Henze? You have got to push the button.

Ms. HENZE. Mr. John Robbins sitting behind me.

Mr. GREENWOOD. Very well. Thank you.

Ms. Sanders?

Ms. SANDERS. Mr. John Robbins sitting behind me.

Mr. GREENWOOD. Okay. And where is Mr. John Robbins. Oh. You

have a busy day today.

All right. In that case, I am going to ask you if you would please

rise and raise your right hand.

[Witnesses sworn.]

Mr. GREENWOOD. Okay. So saying you are all under oath.

And the Chair would now recognize Ms. Henze first for your

opening statement. And so if you will pull the microphone over so

you can speak directly into it.

Mr. GREENWOOD. Good morning, ma’am.

Ms. HENZE. Good morning.

Mr. GREENWOOD. Thank you for being with us. And you are free

to make your statement.

TESTIMONY OF DIANA HENZE, ASSISTANT CONTROLLER,

HEALTHSOUTH CORPORATION; TERESA SANDERS, FORMER

GROUP VICE PRESIDENT AND CHIEF AUDITING OFFICER,

HEALTHSOUTH CORPORATION; STEVE SCHLATTER, FORMER

HEALTHSOUTH PHYSICAL THERAPIST; MICHAEL VINES,

FORMER HEALTHSOUTH EMPLOYEE IN CORPORATE FIXED

ASSETS DEPARTMENT; MARTIN COHEN, SENIOR MANAGING

DIRECTOR, FTI CONSULTING; KELLY CULLISON, FORMER

VICE PRESIDENT OF COMPLIANCE HEALTHSOUTH CORPORATION; AND GREG SMITH, CHIEF AUDITING OFFICER,

HEALTHSOUTH CORPORATION

Ms. HENZE. My name is Diana Henze, and I live in Birmingham,

Alabama.

I am 39 years old, married with two children. I graduated from

the University of Montevallo in 1985 with a B.S. degree in accounting.

After a few accounting positions, I began working for a Birmingham-based healthcare company, ReLife, in 1994. In December

of that year, ReLife was acquired by HealthSouth, and I began

working in HealthSouth’s accounting department. In 1995 and

1996, I helped install a standardized accounting software package

for the accounting department. In 1997, I was promoted to Assistant Vice President of Finance, and in 1998, I was promoted to Vice

President of Finance.

My responsibilities were somewhat ad hoc, but included running

the accounting computer system, preparing quarterly consolidations and assisting in the SEC filings.

Sometime in 1998, after re-running several consolidation processes for one quarter end, I noticed that earnings and earnings per

share jumped up. The amount and timing of those changes seemed

22

odd to me so I approached my supervisor, Ken Livesay, who was

the Assistant Controller. Ken told me that the increase in earnings

was the result of the reversal of some over-reserves and over-accruals. At the time, Ken’s explanation appeared to be reasonable and

I did not pursue the matter further. I did notice a jump in earnings

the next quarter, but I did not question Ken about it.

In January 1999, I went on maternity leave to have my second

son, Douglas, and did not work on the year-end consolidation or the

10-K preparation for 1998. Shortly after returning to work in

March, I assisted in preparing the first quarter consolidation and

10Q preparation for 1999. During that process, I noticed the numbers changing again, and I approached Ken Livesay a second time.

I told him, ‘‘You can’t tell me that we have enough reserves to reverse that would justify this type of swing in the numbers.’’ When

he told me that I was right, I informed him that I did not understand what was going on, but would have no part in any wrongdoing.

Ken apparently went to Bill Owens, the Controller, with my suspicions because Bill called me in an attempt to justify what they

were doing. Bill said that HealthSouth had to make its numbers

or innocent people would lose their jobs and the company would

suffer. I told Bill that I believed that whatever was going on to be

fraudulent, and I would not participate in it and wanted no part

of it. I also asked him to stop whatever it was they were doing and

told him that I was going to keep an eye on it.

The numbers continued to change in the second and third quarter of 1999. After the third quarter, I went to Ken and said

‘‘enough is enough,’’ because the numbers still appeared to be moving with irregularities. I told him I was to going to report these

suspicions to our Compliance Department because I suspected that

fraud was being committed within the accounting department. Ken

said to do what I needed to do.

In October or November 1999, I went to our Corporate Compliance Department and made an official complaint to Kelly Cullison,

who was Vice President of Corporate Compliance. I gave her information on my suspicions and where I thought some of the ‘‘entries’’

were being made. I also gave her information on how to write specific types of queries against the transactional tables within our

system, which helped her look at the fluctuations that were being

made and of which I was suspicious. I did not have access to the

supporting documentation of the suspect journal entries, and therefore, could not give her that information. As it turns out, Kelly did

not have access to the information necessary to investigate my

complaint of suspected fraud.

Ken Livesay called me to ask if I had gone to the Corporate Compliance Department with my complaint because he had been called

to Mike Martin’s, who was the Chief Financial Officer office about

it. I confirmed that I had gone to the Compliance department and

filed a complaint. In a follow-up discussion with Kelly Cullison, I

told her that I stood by my complaint and would not withdraw it.

I do not mean to imply in any way that Kelly tried to get me to

withdraw my complaint because she did not do that.

Shortly after I filed the complaint, Ken Livesay was moved to the

position of Chief Information Officer, and two others were proVerDate 11-MAY-2000 10:25 Jan 13, 2004 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 89963.TXT HCOM1 PsN: HCOM1
23

moted to his previous position of Assistant Controller. I felt that I

had been overlooked for this position and I confronted Bill Owens

about this. I was told by Bill that he could not put me in that position, because I would not do what ‘‘they wanted me to do.’’ Within

a few days, possibly weeks, I requested a transfer from the accounting department and was transferred immediately to our Information Technology Group. Soon after joining ITG, I began working

on an Internet project and ultimately moved to that department

under the supervision of Scott Stone in January 2001. Under

HealthSouth’s new leadership, in May 2003, I was promoted to Assistant Controller of the Corporate Division. I enjoy my work now,

and believe HealthSouth is a good company which can be a profitable business if run properly.

[The prepared statement of Diana Henze follows:]

PREPARED STATEMENT OF DIANA HENZE, ASSISTANT CONTROLLER, HEALTHSOUTH

CORPORATION

My name is Diana Henze, and I live in Birmingham, Alabama. I am 39 years old,

married with two children. I graduated from the University of Montevallo in 1985

with a B.S. degree in accounting. After a few accounting positions, I began working

for a Birmingham-based healthcare company, ReLife, in 1994. In December of that

year, ReLife was acquired by HealthSouth, and I began working in HealthSouth’s

accounting department. In 1995 and 1996, I helped install a standardized accounting software package for the accounting department. In 1997, I was promoted to Assistant Vice President of Finance, and in 1998, I was promoted to Vice President

of Finance. My responsibilities were somewhat ad hoc, but included running the accounting computer system, preparing quarterly consolidations and assisting in the

SEC filings.

Sometime in 1998, after re-running several consolidation processes for one quarter

end, I noticed that earnings and earnings per share jumped up. The amount and

timing of those changes seemed odd to me so I approached my supervisor, Ken

Livesay, who was the Assistant Controller. Ken told me that the increase in earnings was the result of the reversal of some over-reserves and over-accruals. At the

time, Ken’s explanation appeared to be reasonable and I did not pursue the matter

further. I did notice a jump in earnings the next quarter, but I did not question Ken

about it.

In January of 1999, I went on maternity leave to have my second son, Douglas,

and did not work on the year-end consolidation or the 10-K preparation for 1998.

Shortly after returning to work in March, I assisted in preparing the first quarter

consolidation and 10Q preparation for 1999. During that process, I noticed the numbers changing again, and I approached Ken Livesay a second time. I told him, ‘‘You

can’t tell me that we have enough reserves to reverse that would justify this type

of swing in the numbers.’’ When he told me that I was right, I informed him that

I did not understand what was going on, but would have no part in any wrongdoing.

Ken apparently went to Bill Owens, the Controller, with my suspicions because

Bill called me in an attempt to justify what they were doing. Bill said that

HealthSouth had to make its numbers or innocent people would lose their jobs and

the company would suffer. I told Bill that I believed that whatever was going on

to be fraudulent, and I would not participate in it and wanted no part of it. I also

asked him to stop whatever it was they were doing and told him that I was going

to keep an eye on it.

The numbers continued to change in the second and third quarter of 1999. After

the third quarter, I went to Ken and said ‘‘enough is enough,’’ because the numbers

still appeared to be moving with irregularities. I told him I was to going to report

these suspicions to our Compliance Department because I suspected that fraud was

being committed within the accounting department. Ken said to do what I needed

to do.

In October or November of 1999, I went to our Corporate Compliance Department

and made an official complaint to Kelly Cullison, who was Vice President of Corporate Compliance. I gave her information on my suspicions and where I thought

some of the ‘‘entries’’ were being made. I also gave her information on how to write

specific types of queries against the transactional tables within our system, which

helped her look at the fluctuations that were being made and of which I was susVerDate 11-MAY-2000 10:25 Jan 13, 2004 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6621 89963.TXT HCOM1 PsN: HCOM1
24

picious. I did not have access to the supporting documentation of the suspect journal

entries, and therefore, could not give her that information. As it turns out, Kelly

did not have access to the information necessary to investigate my complaint of suspected fraud.

Ken Livesay called me to ask if I had gone to the Compliance Department with

my complaint because he had been called to Mike Martin’s (Chief Financial Officer)

office about it. I confirmed that I had gone to the Compliance department and filed

a complaint. In a follow-up discussion with Kelly Cullison, I told her that I stood

by my complaint and would not withdraw it. I do not mean to imply in any way

that Kelly tried to get me to withdraw my complaint because she did not do that.

Shortly after I filed the complaint, Ken Livesay was moved to the position of Chief

Information Officer (CIO), and two others were promoted to his previous position

of Assistant controller. I felt that I had been overlooked for this position and I confronted Bill Owens about this. I was told by Bill that he could not put me in that

position, because I would not do what ‘‘they wanted me to do.’’

Within a few days or weeks I requested a transfer from the accounting department and was transferred immediately to our ITG (Information Technology Group)

Department. Soon after joining ITG, I began working on an internet project and ultimately moved to that department under the supervision of Scott Stone in January

2001. Under HealthSouth’s new leadership, in May of 2003, I was promoted to Assistant Controller of the Corporate Division. I enjoy my work now, and believe

HealthSouth is a good company which can be a profitable business if run properly.

Mr. GREENWOOD. Thank you, Ms. Henze, and that is a point that

is important for us to understand, that there is new management

at the company and, frankly, wish the new management well in reestablishing the company.

Ms. Sanders, you are recognized for your opening statement.

Good morning.

Ms. SANDERS. Good morning.

TESTIMONY OF TERESA SANDERS

Ms. SANDERS. My name is Teresa Sanders, and I currently live

in Birmingham, Alabama. I am 39 years old and I am married.

In 1986, I graduated from the University of Alabama with a degree in accounting and also received my master’s degree in accounting in 1988.

I began working with Ernst & Young in August 1988 as a staff

auditor, and I was laid off in February 1990. In March 1990, I was

hired by HealthSouth as the Internal Auditor. During my employment I received three promotions, and when I left my title was

Group Vice President and Chief Auditing Officer. My immediate

supervisor was Richard Scrushy, and I reported directly to him for

over 9 years. I left HealthSouth in November 1999.

I was hired by HealthSouth to audit our field operations. When

I started at HealthSouth, the company had 35 facilities, and by the

time I left that number had grown to approximately 2000. I had

complete access to the financial books of the field operations in

order to do my audits. However, I did not have access to the corporate financial books. I did not need access to the corporate books

to perform field audits. Ernst & Young performed the audit on the

corporate books and any reports to the SEC.

As part of my duties as the Chief Auditing Officer, I had to make

reports to the audit committee of the Board of Directors. All meetings that I had with the audit committee were before the full Board

except for one time in the years between 1997 and 1998, when I

met separately with that audit committee. However, that meeting

was attended by Tony Tanner, who is an Executive Vice President

and Corporate Compliance Officer.

25

In 1996, Richard Scrushy approached me about establishing a 50

point checklist which became known as the ‘‘Pristine Audit.’’ After

Mr. Scrushy asked me to develop the checklist, I sent him a memo

expressing my opinion about the checklist. I have attached a copy

of that memo. Mr. Scrushy did not appreciate my opinion on the

matter and again instructed me to develop the checklist for his approval. Mr Scrushy informed me the Pristine Audit was to be handled by Ernst & Young.

I developed the 50 point checklist which Mr. Scrushy approved.

I am attaching a copy of that checklist as well. As you can see, the

Pristine Checklist has nothing to do with the auditing of the financial books of a field facility. The Pristine Audit was nothing more

than a cosmetic, white glove, walk through of a facility. It was in

the nature of quality control and had nothing to do with the financial viability of a particular facility.

By the time I left HealthSouth, I was having problems with Mike

Martin, who was then CEFO. He turned off my computer access to

the general ledgers of the field operations. I needed access to those

ledgers to do my audits. I had to manually retrieve hard copies of

those ledgers, if needed, which was very time consuming.

I also did not like the way that HealthSouth handled an internal

sexual harassment investigation. It was my opinion that the offending employee should have been terminated.

Although I heard rumors that ‘‘they were playing with the

books,’’ I had no knowledge that anyone at HealthSouth was committing fraud.

I ultimately left HealthSouth because I received a better job offer

with Eastern Health Systems in the compliance department as the

Compliance Officer. I was tired of traveling and my new job did not

require any travel.

[The prepared statement of Teresa Sanders follows:]

PREPARED STATEMENT OF TERESA SANDERS, FORMER GROUP VICE PRESIDENT AND

CHIEF AUDITING OFFICER, HEALTHSOUTH CORPORATION

My name is Teresa Sanders, and I currently live in Birmingham, Alabama. I am

39 years old. In 1986, I graduated from the University of Alabama with a degree

in accounting. I received my masters degree in accounting in 1988.

I began working with Ernst & Young in August of 1988 as a staff auditor, and

I was laid off in February of 1990. In March of that year (1990), I was hired by

HealthSouth as the Internal Auditor. During my employment I received three promotions, and when I left my title became Group Vice President and Chief Auditing

Officer. My immediate supervisor was Richard Scrushy, and I reported directly to

him for over nine years. I left HealthSouth in November of 1999.

I was hired by HealthSouth to audit our field operations. When I started at

HealthSouth, the company had thirty-five (35) field facilities, and by the time I left

the number had grown to approximately two thousand (2000). I had complete access

to the financial books of the field operations in order to do my audits. However, I

did not have access to the corporate financial books. I did not need access to the

corporate books to perform field audits. Ernst & Young performed the audit on the

corporate books and any reports to the SEC.

As part of my duties as the Chief Auditing Officer, I had to make reports to the

audit committee of the Board of Directors. All the meetings that I had with the

audit committee were before the full Board except one time in either 1997 or 1998,

when I met separately with the audit committee. However, that meeting was attended by Tony Tanner.

In 1996, Richard Scrushy approached me about establishing a fifty (50) point

checklist which became known as the ‘‘Pristine Audit.’’ After Mr. Scrushy asked me

to develop the checklist, I sent him a memo expressing my opinion about the checklist. I have attached a copy of my memo. Mr. Scrushy did not appreciate my opinion

26

on the matter and again instructed me to develop the checklist for his approval. Mr

Scrushy informed me the Pristine Audit was to be handled by Ernst & Young.

I developed the fifty (50) point checklist which Mr. Scrushy approved. I am attaching a copy of the checklist. As you can see, the Pristine Checklist has nothing to

do with auditing the financial books of a field facility. The Pristine Audit was nothing more than a cosmetic, white glove, walk through of a facility. It was in the nature of quality control and had nothing to do with the financial viability of a particular facility.

By the time I left HealthSouth, I was having problems with Mike Martin. He

turned off my computer access to the general ledgers of the field operations. I needed access to those ledgers to do my audits. I had to manually retrieve hard copies

of those ledgers, if needed, which was very time consuming. I also did not like the

way that HealthSouth handled an internal sexual harassment investigation. It was

my opinion that the offending employee should have been terminated. Although I

heard rumors that ‘‘they were playing with the books,’’ I had no knowledge that anyone at HealthSouth was committing fraud. I ultimately left HealthSouth because I

received a better job offer with Eastern Health Services Systems in the compliance

department as the Compliance Officer. I was tired of traveling and my new job did

not require any travel.

Mr. GREENWOOD. Thank you, Ms. Sanders. Thank you for being

here.

Mr. Schlatter, your opening statement, please?

TESTIMONY OF STEVE SCHLATTER

Mr. SCHLATTER. My name is Steve Schlatter. I am a physical

therapist from Muncie, Indiana. I come before this Committee to

present concerns that arose during my employment as an Administrator of a HealthSouth outpatient clinic from July 1995 to December 2001.

In April 2001, I became aware of an HCFA Transmittal 1828

which discussed the use of the CPT code 97150 group therapy. The

Transmittal states that this code must be used when a therapist

performs ‘‘procedures with two or more individuals concurrently or

during the same time period.’’ My concerns about this were twofold

as this was a common practice within the HealthSouth system and

the fact that HealthSouth’s HCAP system (an automated documentation system) did not make this billing code available for the

clinicians to use. Out of concerns for my professional staff and myself, I felt a corporate explanation regarding this issue would assure us that we were in compliance with all regulations and we

were in fact treating ethically and within the accepted standards

of our profession.

My initial effort was a simple request from HealthSouth for a

written policy. My quest for this information proved to be long,

frustrating, and unsuccessful. I did discuss this issue with the

American Physical Therapy Association Department of Government

Affairs and received the same interpretation of the Transmittal. I

also discussed this issue with a colleague who had hired an independent firm to perform a Medicare compliance audit on his private physical therapy practice. He claimed his auditors were adamant that group therapy charges must be used when treating more

than one patient at a time. I communicated this information to

HealthSouth management and saved all communication to use as

proof that I was attempting to comply with regulations in the event

of an unexpected Medicare audit.

After nearly 2 months, I was told by several colleagues that

HealthSouth personnel in the Columbus, Ohio business office were

27

irritated with my persistence in this matter. At that time I simply

made appropriate internal adjustments within my own clinic to

make sure that we were not treating patients concurrently, which

I felt to be the most ethical and professionally accepted standard

of practice.

In August 2002, I read that HealthSouth was claiming to miss earnings expectations by $175 million due to unexpected changes

in Medicare reimbursements from group therapy. At that time I

felt compelled to share my information with the appropriate authorities, thus bringing me before your Committee today.

I would like to thank you for the opportunity to appear before

this subcommittee, and I am willing to answer any questions.

[The prepared statement of Steve Schlatter follows:]

PREPARED STATEMENT OF STEVE SCHLATTER

Mr. Chairman and Members of the Subcommittee: My name is Steve Schlatter.

I am a physical therapist from Muncie, Indiana. I come before this Committee to

present concerns that arose during my employment as an Administrator of a

Healthsouth outpatient clinic from July 1995 to December 2001. In April of 2001,

I became aware of an HCFA transmittal 1828 which discussed the use of CPT code

97150 group therapy. The transmittal states that this code must be used when a

therapist performs ‘‘procedures with two or more individuals concurrently or during

the same time period.’’ My concerns about this were twofold as this was a common

practice within the Healthsouth system and the fact that Healthsouth’s HCAP system (an automated documentation system) did not make this billing code available

for clinicians to use. Out of concerns for my professional staff and myself, I felt a

corporate explanation regarding this issue would assure us that we were in compliance with all regulations and we were in fact treating ethically and within the accepted standards of our profession.

My initial effort was a simple request from Healthsouth for a written policy. My

quest for this information proved to be long, frustrating, and unsuccessful. I did discuss this issue with the American Physical Therapy Association Department of Government Affairs and received the same interpretation of the transmittal. I also discussed this issue with a colleague who had hired an independent firm to perform

a Medicare compliance audit on his private physical therapy practice. He claimed

his auditors were adamant that group therapy charges must be used when treating

more than one patient at a time. I communicated this information to Healthsouth

management and saved all communication to use as proof that I was attempting to

comply with regulations in the event of an unexpected Medicare audit.

After nearly two months, I was told by several colleagues that Healthsouth personnel in the Columbus, Ohio business office were irritated with my persistence in

this matter. At that time I simply made appropriate internal adjustments within

my own clinic to make sure that we were not treating patients concurrently, which

I felt to be the most ethical and professionally accepted standard of practice.

In August of 2002, I read that Healthsouth was claiming to miss earnings expectations by 175 million dollars due to unexpected changes in Medicare reimbursements from group therapy. At that time I felt compelled to share my information

with the appropriate authorities, thus bringing me before your Committee today.

I would like to thank you for the opportunity to appear before this Subcommittee.

I am willing to answer any questions regarding my statement and testimony.

Mr. GREENWOOD. We thank you, Mr. Schlatter. Thank you so

much.

Mr. Vines, an opening statement, please?

Mr. VINES. Good morning.

Mr. GREENWOOD. Good morning, sir.

TESTIMONY OF MICHAEL VINES

Mr. VINES. My name is Michael Vines. I live in Birmingham,

Alabama. I was employed at HealthSouth from April 1997 to May

2002 working in the Fixed Asset Management Department, and

would answer any questions about that time.

28

Thank you.

Mr. GREENWOOD. Okay. And we will have plenty of them. Thank

you for being with us.

Mr. Cohen, do you have an opening statement?

TESTIMONY OF MARTIN COHEN

Mr. COHEN. Yes. Mr. Chairman and members of the subcommittee, good morning. My name is Martin Cohen. I am currently a Senior Managing Director with FTI Consulting focusing on

financial restructuring of troubled companies.

I have been invited to testify this morning about an analysis that

FTI conducted in the fall of 2002 for HealthSouth.

In mid-September 2002, FTI was hired by the law firm of Fulbright & Jaworski to conduct an analysis of the impact of Medicare

Transmittal 1753 on the revenues of HealthSouth. It is my understanding that Fulbright had been engaged by the Board of Directors of HealthSouth to examine a number of issues, and Fulbright

hired FTI to examine the impact of Transmittal 1753 on

HealthSouth’s outpatient rehabilitation revenues and assess the

reasonableness of the HealthSouth’s assertion that the reduction in

revenue could, on an annual basis, approximate $175 million.

While typically FTI considers itself bound by attorney/client

privilege and attorney work product doctrine when it undertakes

investigations at the direction of counsel, it is my understanding

that current counsel for HealthSouth has waived any such claim of

privilege as to the investigation conducted by FTI, thus allowing

me to testify before you today.

After being retained by Fulbright, I led a team of FTI employees

in analyzing the potential impact of Transmittal 1753 on

HealthSouth’s outpatient rehabilitation revenues. FTI collected detailed coding and billing information from HealthSouth’s billing

files for a limited number of health care facilities for a 2-week period during the months of May and June, 2002.

FTI then created a billing model based upon various assumptions

as to how Medicare outpatient rehabilitation coding guidelines

should be applied in the field. FTI further assessed the potential

impact of Transmittal 1753 on commercial and worker’s compensation insurance revenues.

Applying the data provided by HealthSouth to the billing model

developed by FTI, we next applied those conclusions to

HealthSouth’s outpatient rehabilitation patient population for the

first 6 months of 2002. Using this methodology, we came up with

a series of estimates of the potential impact of Transmittal 1753 on

HealthSouth’s revenues.

FTI presented a draft report to Fulbright on November 5, 2002,

which preliminarily indicated that the potential annualized impact

of Transmittal 1753 on HealthSouth’s outpatient rehabilitation revenues from Medicare, commercial and worker’s compensation could

range from a low of $101 million to a high of $227 million. The

range of impact was largely dependent on the fact that it was unclear how the commercial and workers compensation insurers

would respond to the Medicare changes, either through a change

in billing practice or subsequent reduction in rates. However, during the course of drafting the report FTI staff listened to the

29

HealthSouth third quarter investor call held on November 5, 2002,

and noted significant discrepancies between management’s representations as to the impact of Transmittal 1753 on third quarter

financial results and FTI’s preliminary findings.

Concerned that the HealthSouth management’s representations

during the third quarter investor call, if correct, could indicate a

problem with FTI’s draft analysis, FTI immediately notified Fulbright & Jaworski of the discrepancies.

Further, on November 6, 2002, I wrote to Bill Owens,

HealthSouth’s President and Chief Executive Officer, and requested that HealthSouth provide FTI with certain specific financial information, which could be used to check the discrepancies between FTI’s draft findings and the statements made during the

earnings announcement. Neither Mr. Owens, nor anyone else from

HealthSouth, ever responded to my November 6, 2002 request for

further information, and FTI never finalized its report.

I will be happy to answer any questions the members of the subcommittee may have regarding the draft report.

[The prepared statement of Martin Cohen follows:]

PREPARED STATEMENT OF MARTIN L. COHEN, FTI CONSULTING, INC.

Mr. Chairman and members of the Subcommittee, good morning. My name is

Martin Cohen. I am currently a Senior Managing Director with FTI Consulting, Inc.

(‘‘FTI’’), focusing on financial restructuring of troubled companies. I have been invited to testify this morning about an analysis that FTI conducted in the Fall of

2002 for HealthSouth Corporation (‘‘HealthSouth’’).

In mid-September, 2002, FTI was hired by the law firm of Fulbright & Jaworski

(‘‘Fulbright’’) to conduct an analysis of the impact of Medicare Transmittal 1753

(‘‘Transmittal 1753’’) on the revenues of HealthSouth. It is my understanding that

Fulbright had been engaged by the Board of Directors of HealthSouth to examine

a number of issues, and Fulbright hired FTI to examine the impact of Transmittal

1753 on the HealthSouth’s outpatient rehabilitation revenues and assess the reasonableness of the HealthSouth’s assertion that the reduction in revenue could, on an

annual basis, approximate $175 million. While typically FTI considers itself bound

by the attorney-client privilege and attorney work product doctrine when it undertakes investigations at the direction of counsel, it is my understanding that current

counsel for HealthSouth has waived any such claim of privilege as to the investigation conducted by FTI, thus allowing me to testify before you today.

After being retained by Fulbright, I led a team of FTI employees in analyzing the

potential impact of Transmittal 1753 on HealthSouth’s outpatient rehabilitation revenues. FTI collected detailed coding and billing information from HealthSouth’s billing files for a limited number of health care facilities for a two-week period during

the months of May and June, 2002. FTI then created a billing model based upon

various assumptions as to how Medicare outpatient rehabilitation coding guidelines

should be applied in the field. FTI further assessed the potential impact of Transmittal 1753 on commercial and worker’s compensation insurance revenues. Applying

the data provided by HealthSouth to the billing model developed by FTI, we next

applied those conclusions to HealthSouth’s outpatient rehabilitation patient population for the first six months of 2002. Using this methodology, we came up with

a series of estimates of the potential impact of Transmittal 1753 on HealthSouth’s

revenues.

FTI presented a draft report to Fulbright on November 5, 2002, which preliminarily indicated that the potential annualized impact of Transmittal 1753 on

HealthSouth’s outpatient rehabilitation revenues from Medicare, commercial and

workers compensation could range from a low of $101 million to a high of $227 million. The range of impact was largely dependent on the fact that it was unclear how

the commercial and workers compensation insurers would respond to the Medicare

changes, either through a change in billing practices or subsequent reduction in

rates. However, during the course of drafting the report FTI staff listened to the

HealthSouth third quarter investor call held on November 5, 2002, and noted significant discrepancies between management’s representations as to the impact of

Transmittal 1753 on third quarter financial results and FTI’s preliminary findings.

30

Concerned that the HealthSouth management’s representations during the third

quarter investor call, if correct, could indicate a problem with FTI’s draft analysis,

FTI immediately notified Fulbright & Jaworski of the discrepancies. Further, on November 6, 2002, I wrote to Bill Owens, HealthSouth’s President and Chief Executive

Officer, and requested that HealthSouth provide FTI with certain specific financial

information, which could be used to check the discrepancies between FTI’s draft

findings and the statements made during the earnings announcement. Neither Mr.

Owens, nor anyone else from HealthSouth, ever responded to my November 6, 2002

request for further information, and FTI never finalized its report.

I will be happy to answer any questions the members of the Subcommittee may

have as to the draft analysis performed by FTI.

Mr. GREENWOOD. Thank you very much, Mr. Cohen.

Ms. Cullison, do you have an opening statement.

Ms. CULLISON. Yes.

Mr. GREENWOOD. Good morning.

TESTIMONY OF KELLY CULLISON

Ms. CULLISON. Good morning.

My name is Kelly Cullison, and I live in Birmingham, Alabama.

I am 32 years old. I graduated from the University of Alabama at

Birmingham with a degree in accounting in December 1992.

In August 1994, I was hired by HealthSouth to work in the Internal Audit Department. I held the title of Staff Auditor, Senior

Auditor and Assistant Vice President of Internal Audit. In June

1997, I was transferred to the compliance department and was

given the title of Compliance Director.

The Compliance Department provided an internal mechanism for

the employees to report problems. We ran a day-to-day hotline and

most of the complaints that we received involved personnel problems. Those complaints were routed to the Human Resource Department.

My immediate supervisor was Tony Tanner who was Executive

Vice President of Administration. Mr. Tanner retired in December

1999, and he was replaced by Brad Hale who was my immediate

supervisor until I resigned in January 2001.

Around November 1999, Diana Henze came to me with a complaint about some accounting transactions. This was a face-to-face

meeting with Diana, and she gave specific information about journal entries being posted on a quarterly basis. She gave me specific

queries to run on the computer system to find the journal entries.

In short, Diana’s complaint had to do with possible fraud being

committed. I ran the queries and found large dollar amounts being

entered. However, I did not have access to the supporting documents to determine whether or not the journal entries were legitimate. Therefore, I did not have the means or authority to properly

investigate Diana’s complaint.

I took Diana’s complaint to my supervisor Tony Tanner. He expressed concern and said that he would look into the matter. I believe that I had a follow-up conversation with Diana about her

complaint, but I do not recall the specifics of what was said. However, Diana was clear that she stood by her complaint and would

not withdraw it. Mr. Tanner told me that Diana’s complaint had

been resolved and that the case was closed. I had no reason to

doubt him because I could not investigate her complaint on my

own. Because of the way HealthSouth was structured a complaint

31

such as Diana’s had to go up the chain of command to be properly

investigated.

I left HealthSouth in January 2001 to begin working for myself.

I started my own business doing internal audits for healthcare

companies on an independent contract basis.

At HealthSouth, the Compliance Department was defined too

broadly. It dealt not only with State and Federal laws and regulations but also with internal policy as well. The department was

bogged down with complaints concerning internal policy and personnel decisions, and it simply became a clearinghouse of complaints. As I stated earlier, most complaints were sent to Human

Resources. We did not have the authority or resources to investigate complaints such as the one brought by Diana. What we

should learn from this is that the compliance departments should

have the appropriate resources and authority, such as complete access to corporate books to investigate complaints involving fraud in

financial accounting.

Moreover, compliance departments should consider the merits of

focusing solely on State and Federal laws and regulations rather

than broadly addressing regulatory and personnel issues.

Thank you.

[The prepared statement of Kelly Cullison follows:]

PREPARED STATEMENT OF KELLY CULLISON, COMPLIANCE DIRECTOR, HEALTHSOUTH

CORPORATION

My name is Kelly Cullison, and I live in Birmingham, Alabama. I am thirty-two

years old. I graduated from the University of Alabama at Birmingham with a degree

in accounting in December of 1992.

In August of 1994, I was hired by HealthSouth to work in the Internal Audit Department. I held the title of Staff Auditor, Senior Auditor and Assistant Vice President of Internal Audit. In June of 1997, I was transferred to the compliance department and was given the title of Compliance Director.

The Compliance Department provided an internal mechanism for the employees

to report problems. We ran a day-to-day hotline and most of the complaints that

we received involved personnel problems. Those complaints were routed to the

Human Resource Department.

My immediate supervisor was Tony Tanner who was Executive Vice President of

Administration. Mr. Tanner retired in December of 1999, and he was replaced by

Brad Hale who was my immediate supervisor until I resigned in January of 2001.

Around November of 1999, Diana Henze came to me with a complaint about some

accounting transactions. This was a face-to-face meeting with Diana, and she gave

specific information about journal entries being posted on a quarterly basis. She

gave me specific queries to run on the computer system to find the journal entries.

In short, Diana’s complaint had to do with possible fraud being committed. I ran

the queries and found large dollar amounts being entered. However, I did not have

access to the supporting documents to determine whether or not the journal entries

were legitimate. Therefore, I did not have the means or authority to properly investigate Diana’s complaint.

I took Diana’s complaint to my supervisor Tony Tanner. He expressed concern and

said that he would look into the matter. I believe that I had a follow-up conversation with Diana about her complaint, but I do not recall the specifics of what was

said. However, Diana was clear that she stood by her complaint and would not withdraw it. Mr. Tanner told me that Diana’s complaint had been resolved and that the

case was closed. I had no reason to doubt him because I could not investigate her

complaint on my own. Because of the way HealthSouth was structured a complaint

such as Diana’s had to go up the chain of command to be properly investigated. In

retrospect, it appears that the ‘‘foxes were guarding the chickens.’’

I left HealthSouth in January of 2001 to begin working for myself. I started my

own business doing internal audits for healthcare companies on an independent contract basis.

At HealthSouth, the Compliance Department was defined too broadly. It dealt not

only with State and federal laws and regulations but also with internal policy as

32

well. The department was bogged down with complaints concerning internal policy

and personnel decisions, and it simply became a clearinghouse of complaints. As I

stated earlier, most complaints were sent to Human Resources. We did not have the

authority or resources to investigate complaints such as one brought by Diana.

What we should learn from this is that compliance departments should have the appropriate resources and authority, i.e. complete access to corporate books to investigate complaints involving fraud in financial accounting. Moreover, compliance departments should consider the merits of focusing solely on State and federal laws

and regulations rather than broadly addressing regulatory and personnel issues.

Mr. GREENWOOD. Thank you, Ms. Cullison.

Mr. Smith, for your opening statement.

TESTIMONY OF GREG SMITH

Mr. SMITH. I do not wish to make a statement at this time, but

I will answer your questions.

Mr. GREENWOOD. Very well. Thank you very much.

The Chair recognizes himself for 10 minutes for purposes of inquiry, and we will begin with you, Ms. Henze.

Ms. Henze, you told us in your opening statement that in 1998

you began to notice earnings and earnings per share, as you said,

jump up over a period of a few days during the quarter end consolidation process. Could you explain to us what you were asked to do

that caused you to notice the changes in the numbers?

Ms. HENZE. Yes. One of my sole responsibilities or one of my responsibilities was to run the consolidation process, which is to pull

the numbers together after general accounting was through.

So when general accounting came to me and said they were

through, I pulled—you know, I ran a consolidation process, which

is a totally audited process on the computer, handed it up to my

supervisor, which was Ken Livesay.

Shortly there afterwards, they asked me to rerun it. Open up the

periods—well, actually, I’m sorry. They asked me to open up the

accounting periods so that more entries could be entered into the

system.

Mr. GREENWOOD. And was that in itself unusual?

Ms. HENZE. Not in and of itself. I mean, usually you can run a

consolidation and then be asked to rerun.

Mr. GREENWOOD. Okay.

Ms. HENZE. But this was probably like the third, maybe the

fourth time. I mean, it was continuing to do that. And at this time

of the quarter end it was very unusual that your amounts should

jump dramatically or drastically.

So it was just in this process that after a few times of running

the consolidation that the numbers—that the numbers jumped.

Mr. GREENWOOD. Okay. You told our staff that you also witnessed accounting meetings occurring behind closed doors. Could

you tell us who you recall in those meetings and what appeared to

be happened or what happened after those meetings?

Ms. HENZE. Yes. Usually during the quarter end prior to earnings releases during—after I had run the consolidations, one, twice,

there would be a meeting in a conference room right outside of Mr.

Owens’ office. And——

Mr. GREENWOOD. And just identify who Mr. Owens is.

Ms. HENZE. I’m sorry. Mr. Owens was the Controller at that

time.

33

Mr. GREENWOOD. Okay.

Ms. HENZE. Shortly after this meeting after they would adjourn,

I would get a phone call to open up the accounting periods that

they needed to make some additional entries, which in my previous

answer I would go through that whole process again.

Mr. GREENWOOD. Right. Okay. And was Mr. Livesay there?

Ms. HENZE. Yes.

Mr. GREENWOOD. And Weston Smith?

Ms. HENZE. I believe I recall seeing Mr. Smith.

Mr. GREENWOOD. Susan Jones?

Ms. HENZE. Yes.

Mr. GREENWOOD. Sharon Faulkner?

Ms. HENZE. Yes.

Mr. GREENWOOD. Emery Harris?

Ms. HENZE. Yes, sir.

Mr. GREENWOOD. Kay Morgan?

Ms. HENZE. Yes, sir.

Mr. GREENWOOD. Okay. These are pretty senior level officers

that are meeting, and then soon after you are told to reopen the

consolidation process and, lo and behold, the numbers are changing. Is that what you are testifying to?

Ms. HENZE. That is—that is correct.

Mr. GREENWOOD. Okay. You mentioned that in 1999 you were

called into Bill Owens’ office after you complained to your boss

about your suspensions of fraud. Did Mr. Owens or Mr. Livesay,

your boss, ever deny that the fraud was being committed?

Ms. HENZE. They neither denied nor acknowledged.

Mr. GREENWOOD. They didn’t admit it, they didn’t deny it, they

just sort of nodded their heads, is that what they did? Okay.

You told our staff in an interview that when you were called into

Bill Owens’ office in 1999 after you told your boss Ken Livesay’s

your suspicions about fraud, that Mr. Owens said ‘‘If we do not

meet our earnings, people start losing jobs.’’ Is that what the Controller of HealthSouth told you?

Ms. HENZE. Yes, sir.

Mr. GREENWOOD. Were you shocked?

Ms. HENZE. Pretty much.

Mr. GREENWOOD. Did you take that as an admission that they

were doing something funny with the numbers?

Ms. HENZE. He did not deny it, so it was kind of I really did not

know whether to really believe that they were or that

somebody——

Mr. GREENWOOD. How did you feel emotionally about that?

Ms. HENZE. I was pretty upset.

Mr. GREENWOOD. You also Committee staff that you spoke to

Mike Martin, who was then the CFO of HealthSouth about your

concerns. Could you tell us what you told Mr. Martin and what his

response was?

Ms. HENZE. I went to Mike Martin, it was mainly about being

passed over for a promotion. And——

Mr. GREENWOOD. Did you believe that you were being passed

over because you had brought these concerns?

Ms. HENZE. I did not know what to believe at first.

Mr. GREENWOOD. Okay.

34

Ms. HENZE. But I was told that I did not get the promotion because I did not—would not participate. But in our conversation I

brought up the—what had been occurring within the accounting

department. Mike seemed very upset, but restated some similar to

Bill’s conversation that——

Mr. GREENWOOD. Was he yelling?

Ms. HENZE. He was yelling, not necessarily at me. More of just

that he was approached with an uncomfortable situation.

Mr. GREENWOOD. Did he say the company will go down, we have

to do it?

Ms. HENZE. I believe he—he said something that we have to do

this. I am not sure if he actually said the company will go down.

Mr. GREENWOOD. Okay. And then Mr. Scrushy walked into Mr.

Martin’s office?

Ms. HENZE. Yes, right near the end of our conversation.

Mr. GREENWOOD. Okay. Did Ken Livesay ever relay to you that

he had been told by upper management to ‘‘passive you’’.

Ms. HENZE. Mr. Livesay had called me into his office shortly

after I had gone to the Corporate Compliance. And had asked me

if I actually did go in and file a complaint. He apparently—he had

told me that he got called to Bill—I mean, to Mike Martin’s office

and that eventually they wanted Compliance to come back to the

person who had filed the complaint and instruct them to go back

to Mr. Livesay so that he could smooth things over.

Mr. GREENWOOD. When you spoke with Kelly Cullison about your

suspensions of accounting fraud, did you also mention to her who

you believed might be involved?

Ms. HENZE. Yes, sir.

Mr. GREENWOOD. Did you mention Ken Livesay, Mike Martin,

Bill Owens?

Ms. HENZE. Yes, sir.

Mr. GREENWOOD. Okay. The people that you believed were committing accounting fraud as far back as 1998, have these people

plead guilty to similar charges?

Ms. HENZE. Yes, sir.

Mr. GREENWOOD. Okay. What did you believe would happen

when you made your formal complaint with HealthSouth Compliance Department?

Ms. HENZE. I believed that it—that it would go up to senior—the

most senior level and that appropriate action would take place, and

that the—if it was fraud, which is what I suspected, that it would

be addressed and taken care of.

Mr. GREENWOOD. And do you in fact think now looking back that

it was taken seriously and it was investigated?

Ms. HENZE. I think when I made—I believe when I made my

complaint to the—to Kelly in Corporate Compliance that it was

taken seriously. I do not think that it was taken seriously or handled appropriately beyond that.

Mr. GREENWOOD. What made you decide to go to log a formal

complaint with the Compliance Department?

Ms. HENZE. What made me?

Mr. GREENWOOD. When did you decide it was time to file a formal complaint?

35

Ms. HENZE. When it became apparent that it was going to continue even after my first address to Mr. Owens and Mr. Livesay.

Mr. GREENWOOD. It is a pretty bold thing to do. Were you not

worried about losing your job?

Ms. HENZE. I was not really worried about losing my job.

Mr. GREENWOOD. Because you did not think you would lose it or

because you could survive without it?

Ms. HENZE. Well, I could not really—it would have been tough

to survive without it. You know, technically they could not fired me

for going to Compliance, even though I know that they could have

made it very hard for me.

Mr. GREENWOOD. Yes. Or pass——

Ms. HENZE. But it was not right. So——

Mr. GREENWOOD. Well, good for you.

Ms. HENZE. Thank you.

Mr. GREENWOOD. Let me quickly try to ask a question or two of

Ms. Sanders.

Now you told us you worked for HealthSouth from 1993 to 2000

and you were the Chief Internal Auditor for the company throughout many of those years. To whom did you report to in that capacity?

Ms. SANDERS. Actually, I worked for the company 1990 to 1999.

Mr. GREENWOOD. Okay.

Ms. SANDERS. And I reported to Richard Scrushy, the CEO. And

when I started, he was also the President of the company as well.

Mr. GREENWOOD. Okay. Did the internal audit department have

any direct reporting relationship with the audit committee of the

board of directors?

Ms. SANDERS. In the charter, I believe there was a statement

that they would have a reporting—maybe not a direct reporting relationship, but a reporting relationship to the audit committee.

Mr. GREENWOOD. That is the way it was supposed to work?

Ms. SANDERS. That was the way it was supposed to work. But

in reality I did not have separate meetings with the audit committee except for that one that was in 1990—somewhere

between——

Mr. GREENWOOD. And why was that? You know at the time that

the charter said that there was supposed to be this reporting relationship?

Ms. SANDERS. Correct.

Mr. GREENWOOD. You did not take it upon yourself to make that

happen or you tried and were not given the opportunity, or what?

Ms. SANDERS. It was really—I mean, it was a very difficult thing

to try to push that with Mr. Scrushy. He was—he did not like surprises. He wanted to be in those meetings. So those why those

meetings were usually held always with the——

Mr. GREENWOOD. So did you ever ask Mr. Scrushy if it would be

okay if you reported directly to the——

Ms. SANDERS. I do not recall ever asking him for that specifically,

no.

Mr. GREENWOOD. In the 10 years that you were Chief Internal

Auditor for HealthSouth how many times did you meet with the

audit committee?

36

Ms. SANDERS. One time, and that—I mean, as far as like one

time separately. Whenever we had audit committee meetings, they

were always the full board. They—that meeting was the one that

was attended by Tony Tanner, who was the Executive Vice President and Compliance Officer.

Mr. GREENWOOD. Were you scared that Mr. Scrushy would find

out that you made—I’m sorry.

Let me go back to you, Ms. Henze. And one final question for you

because my time has expired. Were you scared that Mr. Scrushy

would find out that you made the allegations?

Ms. SANDERS. That I made——

Mr. GREENWOOD. No. This is Ms. Henze, I’m sorry. I’m sorry.

Ms. HENZE. I’m sorry, what was your question?

Mr. GREENWOOD. I asked you earlier if you were worried about

losing your job. Were you particularly worried that Mr. Scrushy

would find out about this?

Ms. HENZE. Yes, sir.

Mr. GREENWOOD. Okay. Why were you worried that he would

find out about this?

Ms. HENZE. I was worried about retaliation.

Mr. GREENWOOD. What made you worried about retaliation? Was

there reason?

Ms. HENZE. Just the atmosphere and rumors that circulate within the corporation.

Mr. GREENWOOD. Such as?

Ms. HENZE. That he did not like bad news. That, you know, just

bad things happened. And, you know, one of the examples is definitely you would lose your job, but is it more than just intimidation? I did not know, you know, financially, personally there would

be a retaliation toward me.

Mr. GREENWOOD. Okay. Thank you.

My time has expired. The gentlelady from Colorado.

Ms. DEGETTE. Thank you, Mr. Chairman.

Ms. Henze, were you worried as well as your job about your husband’s job?

Ms. HENZE. Yes, ma’am.

Ms. DEGETTE. And why was that?

Ms. HENZE. My husband works for the University of Alabama in

Birmingham, and Mr. Scrushy has a lot of contact there with the

University.

Ms. DEGETTE. And were you worried that he would have the influence to effect your husband’s job if he was upset with you?

Ms. HENZE. Yes, ma’am. Yes, ma’am.

Ms. DEGETTE. Why is it that you thought that Mr. Scrushy

would go that far in retaliation? What gave you that level of fear?

Ms. HENZE. I cannot really give you a specific. It was more of

just the general atmosphere within the corporate office that you

are not to do anything to cross Mr. Scrushy.

Ms. DEGETTE. Did you get the sense with your position that Mr.

Scrushy kept an eye on the books and knew what was going on in

terms of the financial affairs of the company?

Ms. HENZE. Did I think that he knew what was going on or——

Ms. DEGETTE. Yes.

Ms. HENZE. Yes, ma’am.

37

Ms. DEGETTE. Why?

Ms. HENZE. Well, in the Monday morning meetings that we

would have, he talked about just the numbers of the books and

that he made comments ‘‘I know what’s going on, I am keeping an

eye on everybody’s performance.’’ I mean, you know, mainly talking

about the operational, facility operations. So he—he—he stressed it

within our Monday morning meetings.

Ms. DEGETTE. Now, you were here in the hearing room when we

played the snippets from the ‘‘60 Minutes’’ interview with Mr.

Scrushy, were you not?

Ms. HENZE. Yes, ma’am.

Ms. DEGETTE. I thought I saw you. And I do not know if you

heard Mike Wallace say you don’t keep track of the accounting. Mr.

Scrushy said ‘‘CEOs do not do that. CFOs do that.’’ Do you remember seeing that?

Ms. HENZE. Yes, ma’am.

Ms. DEGETTE. In your experience in your position do you think

that that is true that Mr. Scrushy didn’t keep track of the accounting?

Ms. HENZE. I—I believe that kept an eye on the performance of

the company, maybe not down to the total details of the accounting.

But he kept an eye on what our earnings were, what our performance was.

Ms. DEGETTE. And I think that is the job of the CEO, do you?

Ms. HENZE. Yes, ma’am.

Ms. DEGETTE. Ms. Sanders, I wanted to ask you because you reported directly to Mr. Scrushy what you thought about that statement. Was it your sense that Mr. Scrushy kept track of the accounting, at least on a general basis?

Ms. SANDERS. On a general basis, yes. He—during those Monday

morning meetings that Ms. Henze’s referring to, yes, he would

make those—those comments.

Ms. DEGETTE. Talk if you can a little bit your perception of those

Monday morning meetings?

Ms. SANDERS. They were usually very large, especially toward

the end when I was there because there several hundred—or several hundred people within the room. You were basically to report

on the top five things that you did the previous week and the top

five things that you were going to be reporting on this on the upcoming week.

Usually he followed up with ending comments and would talk

about, you know, he usually had a stack that he would throw up

on the table and say that I have got all the numbers for the—for

every one of the facilities and I am watching, and I know what is

going on in this facilities.

Ms. DEGETTE. So, as the internal auditor you—was that your

title, internal auditor?

Ms. SANDERS. That was my title when I started with the company in 1990, yes.

Ms. DEGETTE. Okay. And, I’m sorry, when you left it was Group

Vice President and Chief Auditing Officer.

Ms. SANDERS. Yes.

Ms. DEGETTE. So it was your job in the Monday morning meetings or the Monday meetings to talk about the auditing, right?

38

Ms. SANDERS. It basically the facilities that we were visiting and

that we had been at last—at the previous week and then the facilities that we were visiting for the coming week. We did not necessarily report on the results of those audits.

Ms. DEGETTE. Now, you did not actually have access to the corporate books when you were doing field audits, did you?

Ms. SANDERS. No, I did not.

Ms. DEGETTE. Did you ever have access to the corporate books?

Ms. SANDERS. No, I did not.

Ms. DEGETTE. How is it as the Group Vice President and Chief

Auditing Officer you would be able to achieve field audits if you

could not compare it back to the corporate books?

Ms. SANDERS. That was not part of our audits. We were to audit

the information that was coming in from the individual facilities,

and to just make sure it had been posted correctly to the general

ledgers. But it was not our responsibility to make sure that it got

pulled into the corporate books or into the consolidation.

Ms. DEGETTE. And whose job was that?

Ms. SANDERS. That would have been left to Ernst & Young to

audit that.

Ms. DEGETTE. The outside auditors?

Ms. SANDERS. The outside—the outside auditors, yes.

Ms. DEGETTE. And you said in your testimony that you had some

concerns, I think it was in 1996, and so you wrote a memo to Mr.

Scrushy about the facility auditing. That is Tab 40 in the notebook

in front of you there.

Ms. SANDERS. Is this the Pristine, referring to the memo about

the Pristine Audit?

Ms. DEGETTE. Right.

Ms. SANDERS. Yes, ma’am.

Ms. DEGETTE. Why did you write that memo to Mr. Scrushy?

Ms. SANDERS. I do not have a copy of it, but I believe I remember

it.

Ms. DEGETTE. It is the one that you said was attached to your

testimony.

Ms. SANDERS. Thank you.

Ms. DEGETTE. It says to Richard M. Scrushy from——

Ms. SANDERS. Yes. Uh-huh.

I wrote it for two reasons. No. 1 was I felt it—not that it was

a waste of money. I agreed with the idea that we needed to do

these types of audits, but I did not necessarily agree that we needed to have a CPA firm performing those audits.

Ms. DEGETTE. So the word ‘‘audit’’ is being thrown around kind

of loosely here.

Ms. SANDERS. Right.

Ms. DEGETTE. Because, I mean, with you you are an accountant,

right?

Ms. SANDERS. Correct. Yes.

Ms. DEGETTE. So when you do an audit, you are talking about

reconciling the books, correct?

Ms. SANDERS. Right. Financially.

Ms. DEGETTE. But that’s not financial information. But that is

not the kind of audit that Mr. Scrushy was talking about, was it?

39

Ms. SANDERS. No. This was more of a quality standards, quality

control.

Ms. DEGETTE. And, in fact, the 50 point—the Pristine factor

audit form?

Ms. SANDERS. Yes.

Ms. DEGETTE. That’s attached to Tab 41, and that was also attached to your testimony.

Ms. SANDERS. Right.

Ms. DEGETTE. That was what you were talking about, that was

the kind of audit that Mr. Scrushy wanted of the facilities, correct?

Ms. SANDERS. Correct, yes.

Ms. DEGETTE. And the kinds of audit is things like: Overall appearances, organized and neat; music is at an acceptable level, etc,

right?

Ms. SANDERS. Correct.

Ms. DEGETTE. Now none of those are financial things?

Ms. SANDERS. No, ma’am.

Ms. DEGETTE. Now, after you sent this memo to Mr. Scrushy, did

you take that concern to anybody else that they were asking you

to do a facilities type audit but not a financial audit? What did you

do about that?

Ms. SANDERS. I—I had cc’d this memo to Jim Bennett, Gerald

Brown, Aaron Beam and Bill Owens. I did not necessarily hear any

responses back from them about this, but that would have been—

this would have been an internal memo and I would not have gone

outside of the company with my concerns about it.

Ms. DEGETTE. But did anybody ever get back to you and tell

you—let me ask you this——

Ms. SANDERS. Which it did, yes.

Ms. DEGETTE. Did you ever do any financial audits of the outside

facilities, of the facilities?

Ms. SANDERS. Yes. That was what we were responsible for, was

doing the financial audits of the field locations, the information

that they were sending in to the corporate office.

Ms. DEGETTE. Did you ever visit the field locations?

Ms. SANDERS. Yes.

Ms. DEGETTE. How many of the field locations?

Ms. SANDERS. When I started, I probably did about 20 of the 35.

And then when we left, we usually budgeted for about 100 facilities

to be audited in a year.

Ms. DEGETTE. Now, I think you said that while you were there—

did you want to correct and answer, ma’am?

Ms. SANDERS. I’m sorry. I’m sorry. No, ma’am.

Ms. DEGETTE. After consulting with counsel?

Ms. SANDERS. Okay. It was—yes. It was my responsible to do the

financial audits on the field locations.

Ms. DEGETTE. Right.

Ms. SANDERS. Yes. Okay.

Ms. DEGETTE. Now, you said there were 35 facilities and one

auditor when you started.

Ms. SANDERS. Right.

Ms. DEGETTE. And then when you left there were 1800 facilities,

correct?

Ms. SANDERS. Correct.

40

Ms. DEGETTE. So were there 50 auditors then when you left?

Ms. SANDERS. No. There were approximately 10 auditors.

Ms. DEGETTE. Ten auditors for 1800 facilities?

Ms. SANDERS. Correct.

Ms. DEGETTE. So were you able to then do the same kind of level

of auditing at the end as you were at the beginning?

Ms. SANDERS. No.

Ms. DEGETTE. Obviously.

Ms. SANDERS. No.

Ms. DEGETTE. Did Ernst & Young ever tell you that your internal audit operation was weak?

Ms. SANDERS. No, they did not make that direct statement to me,

no.

Ms. DEGETTE. Did Ernst & Young ever recommend that you

have access to the corporate books so that you could compare the

audits?

Ms. SANDERS. No, ma’am. They did not make that direct statement.

Ms. DEGETTE. And did Ernst & Young ever recommend that you

get additional staff to complete these audits?

Ms. SANDERS. We talked about adding staff and they tried to

make—they made those recommendations, to my knowledge, to

management. They would make that recommendation, and I am

not sure if it was in the management letter or not, but those would

make those recommendations to management.

Ms. DEGETTE. And did you ever discuss that with Mr. Scrushy,

your immediate supervisor?

Ms. SANDERS. I did talk to him one time about adding more staff.

We did end up adding one or two more people at that point in time.

That was probably the 1996 to 1998 timeframe is what I am thinking.

Ms. DEGETTE. And was that sufficient, was that one additional

staff member sufficient to complete these audits?

Ms. SANDERS. No. No it was nowhere near. No.

Ms. DEGETTE. Now, security at HealthSouth was always very

tight. Were there hidden cameras in the hallways?

Ms. SANDERS. Yes.

Ms. DEGETTE. And where were they, do you know?

Ms. SANDERS. I know of one in particular. It was outside of Bill

Owens’ and Weston Smith’s office.

Ms. DEGETTE. Do you know what those hidden cameras were

for?

Ms. SANDERS. To keep an eye on who was going in and out of

the offices, is all I know.

Ms. DEGETTE. When did you discover that?

Ms. SANDERS. During an investigation that I conducted. A contract employee had falsified and had gotten—falsified documents

and had gotten a check written. And during that investigation

working with the security department they showed me tapes from

those cameras and I realized that there wasn’t a camera that you

could see up there. And they said, well, there is some that are hidden. And they showed me where.

Ms. DEGETTE. How did that make you feel then?

Ms. SANDERS. Oh, a little nervous.

41

Ms. DEGETTE. Thank you.

Mr. GREENWOOD. The time of the gentlelady has expired. The

Chair recognizes the gentleman from Oregon, Mr. Walden for 10

minutes.

Mr. WALDEN. Thank you, Mr. Chairman.

Ms. Henze, you have testified about the reopening of the books

and the adjustments that occurred I think going into the end of

each quarter, is that correct?

Ms. HENZE. Yes, sir.

Mr. WALDEN. Did the numbers ever get adjusted negatively?

Ms. HENZE. Not that I recall. No, sir.

Mr. WALDEN. So to the best of your recollection the numbers

were always enhanced, which would make it seem like the company was doing better than perhaps it was?

Ms. HENZE. Yes, sir. They were always enhanced to meet the

earnings per share that was estimated on the street.

Mr. WALDEN. I want to hear that again. They were always enhanced to meet the earnings per share estimate——

Ms. HENZE. The earnings per share.

Mr. WALDEN. [continuing] that was on the street?

Ms. HENZE. Yes.

Mr. WALDEN. And that is part of why you filed your objection?

Ms. HENZE. Yes, sir.

Mr. WALDEN. Okay. Ms. Sanders, were minutes ever kept of the

Monday morning meetings?

Ms. SANDERS. I am not aware of any minutes that were kept. I

do know that they kept copies of our reports that we submitted for

those meetings.

Mr. WALDEN. Do you know based on what you know about the

security system, were they tapped?

Ms. SANDERS. Not to my knowledge. I do not know. There were

cameras in the conference center, then it would have been taped.

But I am not sure if there are cameras in that conference center.

I do not remember.

Mr. WALDEN. It would be most interesting to find out.

The memo, Ms. Sanders, that you sent to Mr. Scrushy, could you

describe for us to the best of your recollection his specific reaction

to that memo? Did he ever talk to you about that?

Ms. SANDERS. Oh, yes. Yes, sir, he did. He was very upset with

me. I felt like I was disagreeing with what he was wanting to do

and the program that he was wanting to do. And I was told to

get—I needed to pull the wagon and get with the program and go

out and make it happen. And that is basically what I did.

Mr. WALDEN. Is that all he said to you?

Ms. SANDERS. He was very vocal in how he said it, specific language that he used I do not recall. But I just know that he was

very forceful in telling me that I needed to put this memo aside,

he wanted this done and we were going to go forward with this.

Mr. WALDEN. Did he say that you were lucky to have a job?

Ms. SANDERS. Yes, he did. He did tell me that. He said I needed

to remember that I was lucky to have a job. That I had been laid

off from Ernst & Young and that I had not—and I did not have

a job when I had started to work with HealthSouth, yes.

Mr. WALDEN. Did he ever call you an idiot?

42

Ms. SANDERS. He did not use that specific terminology, no. But

he—he certainly made me feel that way once I walked out of there.

Mr. WALDEN. All right. Who chaired the board’s audit committee?

Ms. SANDERS. During the time that I was there it had been Dr.

Philip Watkins.

Mr. WALDEN. And did you ever meet just individually with Dr.

Watkins?

Ms. SANDERS. No, sir. No.

Mr. WALDEN. Did he ever ask to meet with you individually?

Ms. SANDERS. No, sir, he did not.

Mr. WALDEN. Did he ever schedule board meetings, audit committee meetings to meet with you?

Ms. SANDERS. No, sir, he did not.

Mr. WALDEN. Was there ever a discussion about why the internal

auditor reported to senior management and not to the audit committee independently?

Ms. SANDERS. Not with me there was not.

Mr. WALDEN. Did you ever raise that as an issue that maybe

that’s not the way it should work?

Ms. SANDERS. Not with him, no.

Mr. WALDEN. Who did you raise it with?

Ms. SANDERS. The only person that I would have raised that with

would have been when we were writing the charter when I first

started, and that would have been with Tony Tanner and with Mr.

Scrushy at that time.

Mr. WALDEN. So Mr. Tanner and Mr. Scrushy? And you raised

it with them, and what again did the charter say?

Ms. SANDERS. The charter, when it—one it had been revised said

that I reported directly to the CEO and in his absence the CFO of

the company with I believe, it was either administrative or functional responsibility to the audit committee of the board of directors.

Mr. WALDEN. So we get back to this issue of lack of internal control. Would you say based on your auditing experience that there

was extraordinary internal control in the sense that anything you

found went directly to the CEO/President or the CFO, I believe all

5 of whom have now admitted to fraud?

Ms. SANDERS. Yes.

Mr. WALDEN. Is that not a huge gap in internal controls?

Ms. SANDERS. Yes, but our responsibility was only to audit the

field locations. So that information would have gone to the operations personnel as well as in a general report to Mr. Scrushy and

then to whoever, like the president of the company which would

have been Jim Bennett at that point in time.

So, yes, there would be a gap.

Mr. WALDEN. Would you work for a company that set it up that

way again?

Ms. SANDERS. No, sir, I would not.

Mr. WALDEN. All right. Thank you.

Mr. Cohen, why did the alleged $175 million hit that

HealthSouth claimed it took in the third quarter of 2002 not make

sense to you?

43

Mr. COHEN. Actually, they did not claim to have taken a $175

million in the third quarter. Their representation that they made,

if I remember correctly, was that revenues were decreased third

quarter over second quarter by $23 million related to Transmittal

1753.

The 175 was their estimate of an annualized effect including

both Medicare and non-Medicare.

The reason it did not make sense is as part of our analysis we

also sampled a period of time the last 2 weeks of September for the

purpose of seeing if indeed they were—the billing practice had

changed and just how far adrift they were from the guidelines that

we felt were appropriate.

When we did that at the time you did the analysis for that 2

week period, the most had they been following those billing practices throughout that quarter, the most that could have been effected by Transmittal 1753 we felt were somewhere in the $7, $7.5

million range.

Mr. WALDEN. $7 to $7.5 million range?

Mr. COHEN. Right. That would be the most.

We also were aware that for the most part guidance had not

been given throughout the quarter as to changing billing. So our

view was that really the changes in billing were only taking place

starting to take effect the last part of September. So our initial

feeling was that perhaps $2 to $4 million may have been effected

during that quarter. Not 23.

Mr. WALDEN. So did you proceed to find out what accounted for

the other amount of money?

Mr. COHEN. As soon as we saw that, we had just—we heard this

as we were drafting the report. And as soon as we saw it, we let

Fulbright and Jawarksi know that we had some concerns about it,

and that we needed to resolve those before we could ever make the

report final. And then on November 6 I sent a note to Bill Owens

detailing all the representations that were being made and asked

for additional information, and never did get a response. Contacted

him——

Mr. WALDEN. So——

Mr. COHEN. Tried to contact him about three times and never did

get a response.

Mr. WALDEN. Never did get a response?

Mr. COHEN. No.

Mr. WALDEN. So is it your opinion then, was it then and is now

that 1753 would not have had an incredible impact on the company?

Mr. COHEN. My opinion is that I feel very comfortable very with

the analyses that we did. I cannot tell you, I mean, there may—

we did sampling. You could not go out to all the thousands of facilities and do this.

Mr. WALDEN. Sure.

Mr. COHEN. So there is always a potential for error. But I felt

very comfortable with our analyses. And so based on that, I

would—there was virtually no impact on the commercial insurance

during that quarter and the most, as I said, the Medicare could

have possibly been 6, 6.5 and probably was closer to 2 or 3.

44

Mr. WALDEN. Do you think then that Mr. Scrushy was using

Transmittal 1753 as a ruse to cover up other accounting

misstatements that had been made prior to that so you wrap it all

up and blame it on Transmittal 1753, wipe it out, point over here

when really the fraud is over there?

Mr. COHEN. Obviously, at the time we had no knowledge as to

the depths of the fraud that was taking place there. So we were

concerned that perhaps adjustments were being made to contractual allowances for prior periods that might account for the difference. In hindsight knowing what I know today, it certainly

would have been methodology of covering up some of those earnings.

Mr. WALDEN. Mr. Vines, I read a little bit about your comments

on this issue. And I understand the allegation is something in the

order of more than a billion dollars was shifted from expenses over

into capital costs, right?

Mr. VINES. That is correct.

Mr. WALDEN. I guess the question that I cannot answer and

maybe you can, is why the auditors did not more closely question

that much capital asset showing up on the books? Now, I know

from what we have read there is this allegation of manipulation of

the data so that anything from up to $4,999, you know, that Ernst

& Young did not look at anything below $5,000. So those are what,

I guess, got picked up and pulled over and put into assets and amortized over a longer period of time. Is that accurate?

Mr. VINES. That’s correct.

Mr. WALDEN. I am not an account. So help me out here.

But still there should be some paper trail behind that to identify

a billion plus showing up there. What broke down there? How was

that not identified?

Mr. VINES. I do not know, really. I mean it just moved from the

expense accounts to the capital accounts.

Mr. WALDEN. But would you not agree that—I mean somebody

in the accounting side of things, the auditing side of things should

have noticed a billion dollars showing up over there, or is it

just——

Mr. VINES. Well, if it is within a dollar range, the auditors do not look at it. So if it is under $5,000, they are not going to pay

attention to it.

Mr. WALDEN. Right. But in accumulative when you get a get to

a billion showing up on the balance sheet, do that not change——

Mr. VINES. Because if they are looking individual, looking at individual costs instead of overall costs.

Mr. WALDEN. So there is nobody looking at that? It is amazing.

Did you ever have contact with the auditors?

Mr. VINES. Not directly. Any contact I had with the auditors was

through Kathy Edwards, my former supervisor.

Mr. WALDEN. And she has now plead guilty for the fraud?

Mr. VINES. Yes.

Mr. WALDEN. You raised some of these issues, the allegation is,

on Yahoo?

Mr. VINES. Yes.

Mr. WALDEN. Are you Junior?

Mr. VINES. Yes.

45

Mr. WALDEN. And what were you trying to accomplish there you

could not accomplish inside the company?

Mr. VINES. Well, I started posting messages after I left

HealthSouth. I mean, I just wanted the truth out there of what

was going on at HealthSouth in the accounting department and

how expenses were being shifted and, you know, bogus assets

added to the books each quarter.

Mr. WALDEN. Let me ask you this, because part of what we are

trying to do is not just investigate what happened to HealthSouth,

but look at are there changes in accounting rules, laws, things we

do here in the Congress would catch these sorts of problems and

save shareholders extraordinary losses. Is there something we need

to change or was this just criminal behavior already in violation of

law?

Mr. VINES. It is already in law. I mean, I am sorry it is happening. This is you need a tougher compliance department at the

corporations, you know, a monitoring and stronger auditor department, you know, auditing every entry.

Mr. WALDEN. What did Kathy Edwards ask you to do with respect to the capitalization?

Mr. VINES. She had ran some queries on some expense accounts and she wanted me to move out certain expenses from $500 to

right under $5,000, move those out of the expense accounts to the

capital accounts.

Mr. WALDEN. And did you object to that?

Mr. VINES. Not really. The only thing I asked for, is I asked for

her signature on the entries after the entries were prepared.

Mr. WALDEN. And you did that for what purpose?

Mr. VINES. I was not comfortable with the entries.

Mr. WALDEN. So you knew this was not a right thing to do?

Mr. VINES. Yes.

Mr. WALDEN. But you did not—basically the signature gives you

CYA?

Mr. VINES. Yes.

Mr. WALDEN. That is what you were after. And you—why did

you not come forward like Ms. Henze came forward and file a complaint within the internal workings? Is it fear, is it——

Mr. VINES. Fear. I was afraid I would lose my job.

Mr. WALDEN. Thank you, Mr. Chairman. That is all the questions I have at this time.

Mr. GREENWOOD. The Chair thanks the gentleman, and recognizes the gentleman from New Jersey, Mr. Ferguson for 10 minutes.

Mr. FERGUSON. Thank you, Mr. Chairman.

I just want to begin by thanking all the witnesses for being here

today. I really believe that you are acting in the best way that you

know how to try and account for this situation and to try and prevent this kind of a tragedy from happening again.

I want to begin with Mr. Vines, if I might. Mr. Vines, you knew

people at HealthSouth were making accounting entries that you

were not comfortable with, is that correct?

Mr. VINES. Yes.

Mr. FERGUSON. While you were employed at HealthSouth did you

ever personally witness a falsification of a document that were

46

being given to your auditors, to Ernst & Young? And if you did, tell

us about that.

Mr. VINES. Yes, I did. It was for the 2001 audit, I believe, at

HealthSouth. The auditor while they were questioning an asset addition, which was an AP summary on a general ledger, well Kathy

Edwards had scanned the accounts payable system to find a dollar

amount close to that amount that she needed. She then ordered me

to get that copy of the invoice for her. And then she scanned the

invoice into her computer system and made the changes she needed

on the invoice to give to the auditors.

Mr. FERGUSON. You had testified in court about a fake asset in

Kansas?

Mr. VINES. Yes.

Mr. FERGUSON. Being supported by alerted documentation for an

asset from Massachusetts. And as you were just saying and as I

understand it, people were using scanners and computers to create

false documents and using them to lie to the auditors?

Mr. VINES. That is correct.

Mr. FERGUSON. That is correct?

You seem to have discussed these uncomfortable entries with

some of your colleagues. In April you testified that you discussed

this with asset manager supervisors for the other two regions. Who

were those people in the east and in the west?

Mr. VINES. The west was Wendy Walker and the east was on

Amy Watts.

Mr. FERGUSON. And you had testified that between the three of

you that you covered all 1800 HealthSouth facilities and that Amy

Watts and Wendy Walker the same kind of thing was happening

in their offices that was happening in yours, is that right?

Mr. VINES. I believe so.

Mr. FERGUSON. And I have got your testimony from a Federal

court here, and I want to ask you some of the questions that were

posed to you then.

There was this fraud hotline within HealthSouth, the 1-800 hotline program with cards that had been passed out to all the employees to report anything that you were not comfortable with. Is

that right? You are familiar with that?

Mr. VINES. Yes, I am.

Mr. FERGUSON. Did you ever call that hotline to report these

frauds, these falsification of documents that were being given to

your auditors?

Mr. VINES. No, I did not.

Mr. FERGUSON. Okay. After you talked to Amy Watts and Wendy

Walker about what was going on, did either one of them indicate

that they were going to call the hotline or had called the hotline?

Mr. VINES. No, they did not. Not to me they did not.

Mr. FERGUSON. Did you have any conversations amongst yourselves suggesting that one another may be—someone call the hotline?

Mr. VINES. No.

Mr. FERGUSON. Did you talk amongst the three of you about possibly informing your auditors about what was going on, about going

right to Ernst & Young to tell them some of these things that you

were uncomfortable with?

47

Mr. VINES. No. No, we did not.

Mr. FERGUSON. Okay. Thank you.

Mr. VINES. Thank you.

Mr. FERGUSON. I want to move on to Ms. Henze.

Ms. Henze, you have testified in Federal court that you knew

that fraud was being perpetrated by some of your superiors at

HealthSouth, is that correct?

Ms. HENZE. I suspected fraud was being——

Mr. FERGUSON. You suspected so, okay.

And you had said, and you have made clear today that you did

not want to sit idly by while this was going on?

Ms. HENZE. Right.

Mr. FERGUSON. It was obviously making you uncomfortable and

you have talked about kind of a culture of fear and intimidation.

I do not have any question. And it is clear from your testimony

today that you were trying to do the right thing, and I do not question that at all. But looking back, do you ever wish that you had

gone directly to the outside auditors to talk about what was going

on within the company? I mean, you had—your superiors who you

believed or you suspected that they were committing fraudulent

acts and you obviously were involved in this or a victim of, in many

ways, this culture of fear, this culture of possible retaliation not

only against you, but as you said against your husband. Did you

ever think or consider going to the outside auditors to talk to them

about what was going on?

Ms. HENZE. I just used internal purposes.

Mr. FERGUSON. Okay. Why? Any idea why? Was it because of

this fear or——

Ms. HENZE. Can you repeat the question?

Mr. FERGUSON. Sure. We talked about your suspicions of fraudulent activities that were being done or perpetrated by your superiors, by the executives. I mean, we have 15 people who have plead

guilty to various sundry things, so I think some of your fears have

been substantiated or your suspicions have been confirmed. But my

question was about going to outside auditors, your outside auditors

Ernst & Young. You know, there were documents that were being

fraudulently constructed and used to perpetrate this fraud and to

mislead your outside auditors Ernst & Young. And my question

was did you ever, because of your suspicions of what your supervisors were doing, did you ever think to go to or consider going directly to the outside auditors to tell them about your suspicions or

your concerns?

Ms. HENZE. First of all, I did not know there was the documentation thing that was going on.

Mr. FERGUSON. Okay.

Ms. HENZE. No, I—I personally felt that it should—I should go

through the channels that were made available to me, which was

our corporate compliance.

Mr. FERGUSON. So you never considered telling someone outside

the company, the external auditors?

Ms. HENZE. Yes, I had thought about it. But I chose not to.

Mr. FERGUSON. And why is that?

Ms. HENZE. Because I felt that it needed to be handled internally

first and then let compliance, which was my avenue to take this

48

kind of suspicion to and let them handle it with the appropriate authorities at that time.

Mr. FERGUSON. Okay. Thank you very much.

I just have a couple of questions for Ms. Sanders.

You were at HealthSouth from 1990 to 1999, is that right?

Ms. SANDERS. Correct.

Mr. FERGUSON. Okay. And you were the director of internal

audit?

Ms. SANDERS. I started out as the internal auditor. Was promoted to assistant VP and then to Vice President, and then Group

Vice President.

Mr. FERGUSON. Depending on the company, the role of internal

auditor varies, is that right?

Ms. SANDERS. Correct.

Mr. FERGUSON. And according to your testimony in Federal court

your job description differed from what many would consider a typical internal auditor, is that correct?

Ms. SANDERS. If you—if you were hiring an internal auditor to

be for an entire corporation, then yes my job description differed.

Mr. FERGUSON. Your role it seems based on your testimony in

the past, your role as internal auditor tended to be more focused

on the field operations?

Ms. SANDERS. Correct.

Mr. FERGUSON. And not on auditing the books at the corporate

level?

Ms. SANDERS. Correct.

Mr. FERGUSON. Is that correct?

Ms. SANDERS. Yes.

Mr. FERGUSON. All right. And you suspected fraud?

Ms. SANDERS. I didn’t suspect fraud. I had heard rumors about

it, but I never had anyone bring me information saying this is

what’s happening, let me show you what’s going on.

Mr. FERGUSON. But you requested access to the books, the corporate books, is that right?

Ms. SANDERS. To the corporate books, yes. It was not because I

suspected fraud, no.

Mr. FERGUSON. But your request was denied, is that correct?

Ms. SANDERS. Correct.

Mr. FERGUSON. How did that make you feel? Was that common?

Did you—was that the response you expected?

Ms. SANDERS. Not necessarily that I expected, but I was told that

I was hired to audit the field locations and that is what Richard

wanted me to do. So I didn’t——

Mr. FERGUSON. Based on the rumors that you had heard and

then being denied an opportunity to review the corporate books, did

you have any suspicions yourself of fraudulent activities? Did you

think there was any merit to these rumors of possible fraudulent

activity?

Ms. SANDERS. Since I did not have any documentation to prove

that it was going on, it was strictly a rumor and I could not necessarily go running up to the executive level with saying oh, I am

hearing all these rumors that are going on. I needed something

more substantial to be able to start an investigation and to be able

to pursue it.

49

Mr. FERGUSON. But you did not have an opportunity to get anything more substantial because your superiors were denying you

that information?

Ms. SANDERS. Correct.

Mr. FERGUSON. So did that give you any suspicion, a hunch, anything at all?

Ms. SANDERS. It did not give me the warm fuzzy, if you want to

put it that way.

Mr. FERGUSON. Okay. Did you ever share that with your external

auditors?

Ms. SANDERS. With the external auditors, no, I did not share that

I did not have access to that. They did understand, though, that

I only audited the field locations just because they saw what our

audits, the list of audits that we did and then the list of audits that

we were either planning to do over the next year or that we had

completed. Because they reviewed our work at the year end.

Mr. FERGUSON. Okay. Thank you.

My time is up. I just want to thank the witnesses for being here.

I want to thank you. I know you are—I really believe that you were

operating on good faith and appreciate your cooperation here this

morning. Appreciate it.

Mr. GREENWOOD. The Chair thanks the gentleman, and Mr. Rogers is recognized for 10 minutes.

Mr. ROGERS. Thank you, Mr. Chairman.

I appreciate the opportunity to be here, and I appreciate the witnesses here today. As a former FBI agent, I can tell you your work

and honest testimony is incredibly important to get to the bottom

of this particular set of pretty bad circumstances. And we thank

you for having the courage to do that.

I have just a few questions, Mr. Chairman.

Mr. Cullison, you were the head of Corporate Compliance, as I

understand it. Is that correct?

Ms. CULLISON. I was the Compliance Director. I reported to the

Corporate Compliance officer.

Mr. ROGERS. Right. And how would you define your job responsibilities?

Ms. CULLISON. I ran the day-to-day operations of the compliance

department, which included running our employee hotline, coordinating training for our employees, day-to-day types of things.

Mr. ROGERS. And explain the employee hotline to me, if you

would?

Ms. CULLISON. Certainly. The employee hotline was a mechanism

that we put into place for employees to report any wrongdoing, any

questions that they had, concerns that they had about violations of

our internal policies or State or Federal regulations or laws. And

the hotline, it was just that. And when a case came in, we either

routed it to the appropriate department and if it was not a matter

for us to investigate or we handled the investigation within our department.

Mr. ROGERS. So it could be an equal opportunity complaint, it

could be an audit?

Ms. CULLISON. Right. It ran the gambit. Everything from personnel issues, which really amounted to about 75 to 80 percent of

50

our calls, any kind of financial issues. Really anything that an employee had a question about.

Mr. ROGERS. So you would take that information, and how would

you handle it? What would you do with that information that came

off of that employee hotline?

Ms. CULLISON. We would log it into a computer system. We kept

track of the date the call was received, if we knew any information

about the general location, the facility or the state, we would keep

track of that information. We lodged the details of the call and any

kind of resolution that was done as well.

Mr. ROGERS. Now you know a person named Diana Henze, correct?

Ms. CULLISON. Yes.

Mr. ROGERS. She also worked with HealthSouth as well?

Ms. CULLISON. Correct.

Mr. ROGERS. That is correct. Is it true that Ms. Henze reported

to you that there was fraud at the company in relation to inflated

earnings?

Ms. CULLISON. She reported that she had some suspicions about

accounting transactions that she had seen.

Mr. ROGERS. And how did you dispose of that information?

Ms. CULLISON. When she came and talked to me, she gave me

tips on what types of queries to run on our accounting system,

what types of journal entries to look for. So I ran those queries and

was able to confirm the types of journal entries that she had concerns about did exist.

From that point forward I did not have the authority or the

means to investigate it any further. I did not have access to the

supporting documentation for those journal entries, so I took it to

my supervisor, Tony Tanner, and he told me that he was concerned

about it and that he would look into it.

Mr. ROGERS. Did you tell anyone else in the company about this

report?

Ms. CULLISON. Not that I recall.

Mr. ROGERS. Were you ever told not to talk to your external auditing company?

Ms. CULLISON. No.

Mr. ROGERS. Okay. Did you ever have any feeling that that

might be something you should do?

Ms. CULLISON. No. I felt like I had taken it through the proper

channels by taking it to my supervisor.

Mr. ROGERS. Did you ever hear through your supervisor or did

you ever directly talk to Mr. Scrushy that this report had been

made and that he had acknowledged the receipt of it either by your

supervisor; ever have that conversation anytime in your employment?

Ms. CULLISON. Did I have knowledge that Mr. Scrushy was

aware of it?

Mr. ROGERS. Yes.

Ms. CULLISON. No.

Mr. ROGERS. What did you your supervisor tell you he had done

with that information?

51

Ms. CULLISON. He did not give me details of his investigation. He

merely told me that he had looked into it and that the allegations

were unsubstantiated.

Mr. ROGERS. Did you believe that to be true at the time?

Ms. CULLISON. I had no reason not to believe that.

Mr. ROGERS. Did you ever go to the audit committee of the board

of directors?

Ms. CULLISON. No, I did not have reporting authority to them.

Mr. ROGERS. Did you ever directly have communication with

Ernst & Young about either the complaint or the inconsistencies

that you saw, or your report to your supervisor?

Ms. CULLISON. No.

Mr. ROGERS. None of those things happened?

Ms. CULLISON. No.

Mr. ROGERS. Now, did you at anytime subsequently to this have

a conversation with Ms. Henze as to what happened with that information?

Ms. CULLISON. We had a follow up conversation or two after her

initial report to me. I do not remember the details of that. She continued to make it clear that that she stood by her complaint.

Mr. ROGERS. Did you give her any advice that she may want to

seek someone else’s advice at that particular time, by any chance?

Ms. CULLISON. I do not recall giving her that type of advice.

Mr. ROGERS. Okay. Do you have any idea what kind of direction

you may have offered her at that time?

Ms. CULLISON. I do not recall. I am sorry.

Mr. ROGERS. Did you see after that time any increase in the

number of calls to the hotline about audit irregularities?

Ms. CULLISON. No.

Mr. ROGERS. Nothing?

Ms. CULLISON. No.

Mr. ROGERS. Again, I appreciate your honesty in being here. And

I have to tell you how important it is that you are here so that we

make sure this does not happen in the future.

And, Mr. Chairman, I am going to yield back the balance of my

time.

Mr. GREENWOOD. The Chair thanks the gentleman, and would

make two notes. Oh, we will go to Mr. Stearns next.

We anticipate votes within the next 15 minutes, but we also intend to do a second round of this panel.

The gentleman from Florida, Mr. Stearns, is recognized for 10

minutes.

Mr. STEARNS. Thank you, Mr. Chairman.

In the time I have I thought I would talk to Mr. Schlatter. He,

from what we have heard in the witnesses and the panel this

morning, Mr. Chairman, seems like he was a person with a conscience, an individual that was asking questions and sort of like in

our past hearings here we have had people which we call whistleblower, but he might not be a strict sense a whistleblower, but he

was an individual that had conscience and was asking some questions. And I understand you are a physical therapist who used to

work in HealthSouth facility?

Mr. SCHLATTER. Yes, sir.

52

Mr. STEARNS. From July 1995 through December 2001. And, as

I understand it from your opening statement, you started questioning some of the billing practice for group therapy.

Now, under Medicare reimbursement, if you are reimbursed for

group therapy, that is less than for one-on-one, is that correct?

Mr. SCHLATTER. Way less, yes.

Mr. STEARNS. Way less.

And you attempt a corporate policy on this issue. And what was

the reaction to your corporate policy?

Mr. SCHLATTER. I never received one. My initial email was to a

gentleman who was involved with the HCAP system, and he responded that there was a policy. But over the next——

Mr. STEARNS. So you asked him? Can I see the——

Mr. SCHLATTER. Yes. Yes.

Mr. STEARNS. Okay.

Mr. SCHLATTER. Yes. However, over the next 2 months this policy

was never able to be produced.

Mr. STEARNS. And this policy was to include whether it is group

therapy for reimbursement versus one-on-one?

Mr. SCHLATTER. I understood that, yes, there was just no way for

us document in our HCAP system that we were doing group therapy. And in essence, we were doing that. We just could not document that we were doing that. We were continuing to bill as oneon-one.

Mr. STEARNS. So you did a lot of group therapy?

Mr. SCHLATTER. Yes, sir.

Mr. STEARNS. And you were billing it, you were told to bill it as

one-on-one?

Mr. SCHLATTER. That is the only way we could.

Mr. STEARNS. Okay. And how long did this go on?

Mr. SCHLATTER. This—the Transmittal was actually dated 1996.

Our profession as a whole was unaware of this transmittal. I myself was made aware of it in April 2001 from a weekly publication

of the ELI Rehab Report. Upon receiving that report, I sought information in put from HealthSouth and I also called our American

Physical Therapy Association for their interpretation. And I spoke

with a personal friend, colleague, who had just recently gone

through an voluntary Medicare audit of his own private practice to

discuss these issues.

Mr. STEARNS. How many physical therapists like yourself do you

think approximately were working for HealthSouth doing the same

type of thing that you were doing; that is billing for individual

therapy when you were doing group therapy?

Mr. SCHLATTER. Hundreds.

Mr. STEARNS. Hundreds? And so this went from 1996 to the year

2001?

Mr. SCHLATTER. Correct.

Mr. STEARNS. So we compound what you were very disturbed

about by hundreds of employees, two or three hundred maybe,

maybe a thousand? Do you think we are talking about——

Mr. SCHLATTER. Oh, thousands, yes.

Mr. STEARNS. Thousands. So let us move from the word ‘‘hundreds’’ to thousands of employees doing physical therapy and

53

they’re doing it in group and they are billing it as one-on-one because there is no corporate policy, is that correct?

Mr. SCHLATTER. There was no way in our billing system to bill

for group therapy.

Mr. STEARNS. Okay. So there must be at some point, based upon

you emailing and asking for corporate policy and reading in the literature that it was wrong and knowing innately that this is wrong,

this must have troubled our conscience?

Mr. SCHLATTER. Very much. That is why I was persistent in trying to get some resolution.

Mr. STEARNS. And did you ever get a resolution to your concern?

Mr. SCHLATTER. No, sir.

Mr. STEARNS. Okay. So in the roughly 6 years you were there

you never got any support from above saying look, we will give you

a corporate policy on this?

Mr. SCHLATTER. We—I did not actually start asking about the

policy until I was made aware of it in April 2001.

Mr. STEARNS. 2001?

Mr. SCHLATTER. Yes.

Mr. STEARNS. Okay. Did you ever go to anybody else, for example

to the Corporate Compliance Department?

Mr. SCHLATTER. No, I did not.

Mr. STEARNS. Okay. Did you never know there was a Corporate

Compliance Department?

Mr. SCHLATTER. I was aware of it. I had a supervisor quite candidly tell me that I did not want to go there, they would make my

life miserable.

Mr. STEARNS. So you got threatened? You got intimidated?

Mr. SCHLATTER. Yes.

Mr. STEARNS. And were you intimidated or intimidated maybe is

a lighter word than threatened, intimidated over the whole period

or was this just sporadically or was this consistent, or how would

you say that pressure was put on you? Over what period of time

and how often? Monthly, weekly, yearly?

Mr. SCHLATTER. No, I would not say intimidated. I mean——

Mr. STEARNS. Harassed? Harassed not the right word either.

Mr. SCHLATTER. Pressured.

Mr. STEARNS. Pressured. Pressured. Yes. Okay.

So with this letter pressure you thought well, who am I? I am

a physical therapist. I am working in the chain of command here

and the people at HealthSouth said there is no corporate policy, because they have not answered my question and there is thousands

of my colleagues billing improperly. Is there a check off box that

you had to actually say whether it was group therapy or individual?

Mr. SCHLATTER. No. No.

Mr. STEARNS. Okay. So you just submit the hours and the costs

to HealthSouth and they would submit it to Medicare?

Mr. SCHLATTER. No. We did all of our documentation, our clinical

procedures on a laptop, okay. And the—the program—it was programmed, okay. And it was programmed to base our billing based

on what we entered in that we had done. What procedures we had

done. What exercises we had done. We therapy modalities we had

54

done. And our billing statement was just generated from what we

had entered.

Mr. STEARNS. Okay. So this would be then given to? To whom

was it given?

Mr. SCHLATTER. It went via computer to Birmingham.

Mr. STEARNS. To Birmingham. And in Birmingham just run

through my mind, what do you think happened there? I mean, did

they just take your hours and then submit to to Medicare as individual therapy?

Mr. SCHLATTER. Yes.

Mr. STEARNS. And how did you know they were doing that?

Mr. SCHLATTER. Well, I mean, I knew it was being billed one-onone because the group therapy was not—again, it was not on the

billing statement.

Mr. STEARNS. Oh. So you only had one box?

Mr. SCHLATTER. Again, that was all taken right off the software

of the computer.

Mr. STEARNS. Okay. I see.

Mr. SCHLATTER. I did not, per se, check group, one-on-one.

Mr. STEARNS. Did HealthSouth develop that software?

Mr. SCHLATTER. Yes.

Mr. STEARNS. Okay. And it was not done by an outside source?

Mr. SCHLATTER. No.

Mr. STEARNS. So that did HealthSouth say we had no culpability

because we did not develop that software? It was done in house?

Mr. SCHLATTER. Right.

Mr. STEARNS. And did they update this on a regular basis? Did

you get any revisions to that software?

Mr. SCHLATTER. I had just started working with the HCAP system a couple of months prior to my realization that this was a

problem. We—I mean, I think—I think the HCAP was just rolled

out in my facility in February 2001.

Mr. STEARNS. I got you.

Now, you said in your opening statement that you tried to make

internal adjustments at your clinic when you could not get resolution to this corporate issue of group therapy.

Mr. SCHLATTER. Yes.

Mr. STEARNS. Maybe just give us briefly what sort of adjustments you are talking about?

Mr. SCHLATTER. I just simply altered the schedule books so that

we would never see two patients at one time. We would not double

book like we had done in the past. And, I mean, that pretty much

took care of it for my clinic. You know, I faced some ramifications

from decreased revenues, but——

Mr. STEARNS. Did you share your protocol that you developed at

your facility with other physical therapists?

Mr. SCHLATTER. Yes.

Mr. STEARNS. And what was the response of these other people?

Mr. SCHLATTER. Actually, I shared it with some of the management people via conference call and I was told that I would face

the repercussions of decreased earnings.

Mr. STEARNS. So they reduce your salary?

Mr. SCHLATTER. No. No. That was not threatened.

55

Mr. STEARNS. What was the threat when you say ‘‘decreased

earnings?’’ Is that universally or——

Mr. SCHLATTER. When I did not meet my budget. You know, the

budget was the thing, you know, that administrators had to be concerned about.

Mr. STEARNS. But you talked about a group therapy reimbursement versus individual.

Mr. SCHLATTER. My bottom would have been effected.

Mr. STEARNS. Bottom line. So what would that mean, what were

they saying to you if you did not meet your figures?

Mr. SCHLATTER. That I would just have to face the consequences.

Mr. STEARNS. And what were the consequences in your mind?

Were they going to fire you?

Mr. SCHLATTER. There were other circumstances involved, but

my facility was closed.

Mr. STEARNS. They would close your facility?

Mr. SCHLATTER. Yes, it was closed.

Mr. STEARNS. It was eventually closed?

Mr. SCHLATTER. Yes.

Mr. STEARNS. Okay.

Mr. SCHLATTER. And I should add, there were other circumstances involved.

Mr. STEARNS. You do not want to share those with us? Are they

too intimate? You do not have to, now. You have done a great job.

Mr. SCHLATTER. No, I will. The majority of my business was

based on workman’s compensation.

Mr. STEARNS. Okay.

Mr. SCHLATTER. We had two HealthSouth industrial medicine

clinics within my hometown. That was the majority of my referrals.

HealthSouth sold those facilities to U.S. Healthworks, who brought

their own therapists in and, thus, that took away my referral base

area.

Mr. STEARNS. Okay.

Mr. Chairman, I yield back the 1 second I have.

Mr. GREENWOOD. Sure you do not want to use that, Mr. Stearns?

Mr. STEARNS. No, thank you.

Mr. GREENWOOD. The Chair notes that, you know, we have just

begun a series of votes on the House floor. So that will consume

probably a half an hour by the time we get to them. So I am going

to recess until 1 o’clock so members will have an opportunity and

the witnesses and the audience, as well, have an opportunity to get

some lunch. And perhaps some of the staff members might inform

the witnesses where they can find lunch over the course of the

hour.

So we will reconvene at 1 o’clock.

[Whereupon, at 11:58 a.m., the subcommittee recessed, to reconvene at 1:09 p.m., the same day.]

Mr. GREENWOOD. The committee will come to order.

We thank the patience of the witnesses. We hope that they found

a place to have a sandwich and are refreshed.

The Chair recognizes himself for 10 minutes for inquiry, and Mr.

Vines, I would like to begin with you.

Under questioning from Mr. Ferguson, he asked you a series a

questions about why you did not report what you were suspicious

56

of to the company sooner. Do you believe that the hotline could

have been bugged and is that why you did not report what was

going wrong with the accounting?

Mr. VINES. I was afraid I would lose my job if I went to the Compliance Department.

Mr. GREENWOOD. Okay. But I thought you may have told staff

that you were not sure that the hotline was monitored, that somehow you would not have anonymity if you used the hotline? Is that

the case?

Mr. VINES. That is true. That is true.

Mr. GREENWOOD. Did you have any reason to believe that? Were

there rumors to that effect in the company?

Mr. VINES. Just rumors and just a feeling.

Mr. GREENWOOD. Okay. All right.

Let me to go to Ms. Cullison. Okay. I am sorry. I am not going

to Ms. Cullison. I am going to Ms. Sanders.

Okay. If you turn to Tab 67 in your notebook there, you will find

what’s popularly will be called the ‘‘Fleeced Shareholder Email.’’ Do

you recall being provided this document by Bill Horton or anyone

else at HealthSouth around November 1998? This was, apparently,

a memo or an email that was sent anonymously from someone who

had called himself or herself a fleeced shareholder. Went to a long

list of folks at Ernst & Young and at HCFA and at the SEC, and

it relayed concerns about the bookkeeping at HealthSouth. Have

you seen this in that timeframe?

Ms. SANDERS. I do not recall seeing this memo. I do recall having

a discussion with Bill Owens to generate a response to one of the

things in the memo.

Mr. GREENWOOD. And that was what timeframe? Back around

late 1998?

Ms. SANDERS. Yes.

Mr. GREENWOOD. So you were aware of this? Did he——

Ms. SANDERS. I do not recall him going into detail as to why I

needed to write the memo and the response.

Mr. GREENWOOD. Okay.

Ms. SANDERS. I do not remember seeing this.

Mr. GREENWOOD. Okay. Is it fair to say you probably would have

remembered a memo that said from a ‘‘fleeced shareholder’’?

Ms. SANDERS. Yes. Yes. I believe I would.

Mr. GREENWOOD. Have you previously had a chance to review

the allegations contained in the memo?

Ms. SANDERS. Just a few moments ago I was glancing through

here, and then when I met with your staff, yes.

Mr. GREENWOOD. Okay. As chief internal auditor of the company

were these the kinds of allegations that you should have been

made aware of?

Ms. SANDERS. Anything to do with the field operations, yes, especially the comment made about how come the HealthSouth outpatient clinics treat patients without recertification, both the revenue and carry it after being denied payment. Yes, I should have

been made aware of that.

Mr. GREENWOOD. All right. So you would expect that if someone

in the company was aware that these allegations were being made,

the appropriate thing to do would have been to bring that to your

57

attention so that you could have used your capacities and resources

to ascertain its veracity, is that fair to say?

Ms. SANDERS. Correct, yes.

Mr. GREENWOOD. Okay. Did Mr. Horton or Mr. Owens ever advise you that they were undertaking an internal investigation in

the allegations of accounting fraud at the company?

Ms. SANDERS. No, sir. They did not.

Mr. GREENWOOD. Okay. Would you turn to Tab 38 now, please?

Ms. SANDERS. Yes.

Mr. GREENWOOD. Okay. This is a memo that apparently you sent

to Bill Horton on December 9, 1998, having to do with outpatient

audits between 1996 and 1998. Is that right?

Ms. SANDERS. Correct.

Mr. GREENWOOD. Okay. Do you recall writing this memo?

Ms. SANDERS. Yes, I do.

Mr. GREENWOOD. Okay. And what was your understanding of the

request for this information?

Ms. SANDERS. That would have been, and in reading it, it says:

‘‘Per your request below is the summary of the insurance

verification portion.’’ They were asking me are we doing—that

would deal with the recertification. Did we verify that there was

insurance on a patient before we treated them.

Mr. GREENWOOD. And what was the answer to that?

Ms. SANDERS. The answer was yes, we did go through that process in our facility.

Mr. GREENWOOD. Okay. Let me turn to Mr. Smith, to whom I

think no questions have been addressed yet. I do not want you to

feel left out, Mr. Smith.

How long have you been with the internal audit department at

HealthSouth?

Mr. SMITH. Going on 9 years.

Mr. GREENWOOD. Okay. And how long have you been Vice President of Internal Audit?

Mr. SMITH. Since 1999.

Mr. GREENWOOD. Okay. And during the course of your tenure as

head of internal audit how often have you met with the audit committee of the board of directors?

Mr. SMITH. Say that again, please.

Mr. GREENWOOD. Okay. How long and during the course of your

tenure as head of internal audit, how often have you met with the

audit committee of the board of directors?

Mr. SMITH. I have met with the audit committee twice on an individual basis, but I met with them at our board meetings as well.

Mr. GREENWOOD. Okay. So you mean when you attended the

board meetings?

Mr. SMITH. Yes.

Mr. GREENWOOD. Okay. So the other time other than at official

board meetings, the one time that you met with them, was that per

their request?

Mr. SMITH. Yes.

Mr. GREENWOOD. Okay. And so they only ever asked to meet

with you once in 9 years?

Mr. SMITH. Twice. Twice.

Mr. GREENWOOD. Twice in 9 years?

58

Mr. SMITH. Yes.

Mr. GREENWOOD. Okay. To whom have you been reporting?

Mr. SMITH. I have been reporting—currently or at that time?

Mr. GREENWOOD. Over the course of the 9 years.

Mr. SMITH. I was reporting to Teresa Sanders when she was at

HealthSouth.

Mr. GREENWOOD. Okay.

Mr. SMITH. And then when she left, then I took over the department, I reported to Richard Scrushy.

Mr. GREENWOOD. Okay. Did you ever question the fact that as

head of internal audit you never met with the audit committee

other than once or twice?

Mr. SMITH. No, I just—you know, in an off-the-wall conversation,

I think I had asked Teresa at one time did she ever meet with

them. And she said she was having the same type problems.

Mr. GREENWOOD. Yes. Have you held similar capacity in other

companies prior to——

Mr. SMITH. No.

Mr. GREENWOOD. Okay. So did you have a sense of what—you

must have thought that something was amiss if you—that they

were not asking to meet with you if you brought it to Ms. Sanders’

attention and said have you—because you just said have you had

the same problem?

Mr. SMITH. Well, yes. I asked were we supposed to meet with the

audit committee on an individual basis. And I asked her had she

been meeting with them as well.

Mr. GREENWOOD. Okay. And in the course of your tenure there,

I do not know if you belonged to associations or you had opportunities to interact with other individuals in other companies in your

position. Did you, in fact, did you have occasions in the course of

those 9 years to talk to other people from other companies who did

the kind of work that you did or held the kind of positions that you

did?

Mr. SMITH. Yes. By attending seminars.

Mr. GREENWOOD. You went to seminars?

Mr. SMITH. Yes.

Mr. GREENWOOD. Did you ever at any of those seminars say to

your colleagues, you know, it is kind of weird at HealthSouth the

audit committee has only ever asked to meet with me once or

twice, is that the way it is at your company? Or did you have seminars where they said you should expect to meet with your auditors

X number of times a year? I mean, was there a standard that you

were aware of that would have seem to have been the right kind

of communications with the board?

Mr. SMITH. No. It was never addressed in any of our seminars

and I did not have any contact with——

Mr. GREENWOOD. So what made you think that it was a problem?

Mr. SMITH. Well, I just felt like that I probably should be meeting with the audit committee as well.

Mr. GREENWOOD. Why did you feel that?

Mr. SMITH. If I had anything to share with them, you know, the

audit committee should know that.

Mr. GREENWOOD. And did you have things that you would have

liked to have shared with them?

59

Mr. SMITH. No. It would have just been my report.

Mr. GREENWOOD. Okay. But you thought that you should on a

routine basis share your reports with the auditing committee of the

board of directors?

Mr. SMITH. That’s correct.

Mr. GREENWOOD. Okay. Let me go back to Mr. Vines in the time

that I have.

If you would turn to Tab 46, please, in your notebook. Okay. And

could you identify that document for us?

Mr. VINES. That is an email that I sent to HealthSouth’s auditor.

Mr. GREENWOOD. Which was whom?

Mr. VINES. Ernst & Young.

Mr. GREENWOOD. And when did you send that?

Mr. VINES. In June or July 2002.

Mr. GREENWOOD. Okay. So you sent that to Ernst & Young in

2002. Were you with the company at that point?

Mr. VINES. No. I left in May 2002.

Mr. GREENWOOD. In when?

Mr. VINES. In May.

Mr. GREENWOOD. So this is about a month after you left?

Mr. VINES. Yes.

Mr. GREENWOOD. You decided to send an email to Ernst &

Young. And give us the gist of what that email says?

Mr. VINES. Basically that HealthSouth was moving expenses out

of the expense accounts to capital accounts.

Mr. GREENWOOD. Okay. And why did you do that?

Mr. VINES. Because the expenses that were being moved weren’t

legitimate expenses that should be capitalized.

Mr. GREENWOOD. Yes, but you were not with the company anymore, so what do you care?

Mr. VINES. Just I thought the problem should be addressed. It

should have been reported to the auditor.

Mr. GREENWOOD. So I do not want to put words in your mouth,

but you had said earlier that you were afraid that if you blew the

whistle on this, that you might get fired. Now that you left the

company, you felt there was nothing to lose, so you let——

Mr. VINES. Correct.

Mr. GREENWOOD. Okay. And did Ernst & Young ever respond to

your memo?

Mr. VINES. Not to me, they did not, not.

Mr. GREENWOOD. And you gave them an email address so that

they could respond?

Mr. VINES. Yes.

Mr. GREENWOOD. But they did not? You never heard a word from

them again?

Mr. VINES. No.

Mr. GREENWOOD. Did you try to contact them anymore after

that?

Mr. VINES. No.

Mr. GREENWOOD. It just went into a black hole, and that was the

end of it? You never heard of them?

Mr. VINES. Yes.

Mr. GREENWOOD. Okay. My time has expired. The gentlelady

from Colorado is recognized for 10 minutes.

60

Ms. DEGETTE. Thank you, Mr. Chairman.

Mr. Smith, you succeeded Ms. Sanders in your position, correct?

Mr. SMITH. Correct.

Ms. DEGETTE. Thank you.

And how many facilities does HealthSouth have now, right now?

Mr. SMITH. I do not have the exact figures, because they’ve closed

some. But I would say around, maybe, 1700 roughly.

Ms. DEGETTE. And so that would be around the same as when

Ms. Sanders left, maybe more?

Mr. SMITH. Yes, could be.

Ms. DEGETTE. Okay. How many auditors do you have right now?

Mr. SMITH. Currently I have including myself, there’s 5.

Ms. DEGETTE. So you have gone down from 10 when she was

there to now 5, correct?

Mr. SMITH. Correct.

Ms. DEGETTE. And in August 2002 that is when the budget cuts

came through, right?

Mr. SMITH. That is correct.

Ms. DEGETTE. Did you tell the audit committee of the board

about the fact that all of these 1700, or however many facilities,

that you were now being cut back to 5 auditors?

Mr. SMITH. I did and——

Ms. DEGETTE. And what was the response?

Mr. SMITH. I mean, they listened to me. They did not really comment on it. They just thanked me for sharing that with them, and

if I had any——

Ms. DEGETTE. When was that?

Mr. SMITH. That was in August 2002.

Ms. DEGETTE. So over a year ago, right?

Mr. SMITH. Yes.

Ms. DEGETTE. Have you gotten any more auditors since then?

Mr. SMITH. I have not. I am in the process of hiring more now.

Ms. DEGETTE. So you are going to be all the way up to 6?

Mr. SMITH. Six, correct.

Ms. DEGETTE. Do you think that’s enough to really conduct full

audits of all these facilities?

Mr. SMITH. No, I do not.

Ms. DEGETTE. How many do you think you should have on staff?

Mr. SMITH. You know, I would have to study numbers and do

some planning to see. But, I mean, I am not—I could not answer

that right now.

Ms. DEGETTE. Okay. But certainly more than 6?

Mr. SMITH. Oh, yes.

Ms. DEGETTE. Probably a lot more than 10?

Mr. SMITH. Yes.

Ms. DEGETTE. Do you currently have access to the corporate

books?

Mr. SMITH. No, I do not.

Ms. DEGETTE. So you are in the same position that Ms. Sanders

was in, correct?

Mr. SMITH. That is correct.

Ms. DEGETTE. And who are you reporting to right now?

Mr. SMITH. I am reporting to Bob May.

61

Ms. DEGETTE. Okay. And do you think you need to have all that

access knowing what you know now to all the corporate books to

be able to conduct internal audits?

Mr. SMITH. I think it would be helpful to have access to that information.

Ms. DEGETTE. So do I. So what do you intend to do about that?

Mr. SMITH. I would like to meet with the board and specifically

the audit committee to address that issue with them.

Ms. DEGETTE. Okay. Have you met with the board to talk about

these audit issues since all this has transpired?

Mr. SMITH. I have not.

Ms. DEGETTE. Have they requested to meet with you?

Mr. SMITH. They have not.

Ms. DEGETTE. Ms. Sanders, I wanted to ask you there was a period in 1997 you said you did not have access to the corporate ledgers, but you had access to the facility ledgers, correct?

Ms. SANDERS. Correct.

Ms. DEGETTE. But at some point in 1997 your access to those

ledgers was cutoff, too, was it not?

Ms. SANDERS. Correct. It was the computer access to it. I still

had access to the hard copies.

Ms. DEGETTE. And why was that?

Ms. SANDERS. I do not know why. I just know that when we went

in to access that information I was told by our ITG department

that Mike Martin, who was the CFO, had turned that access of.

Ms. DEGETTE. Did you talk to Mike Martin about that?

Ms. SANDERS. I attempted to talk to him, yes.

Ms. DEGETTE. And what happened?

Ms. SANDERS. He told me that I did not need that access to do

my job. We got into a short confrontation about that, and then I

left, and left the meeting with we could go to Mr. Scrushy with

this.

Ms. DEGETTE. And why did you feel it was important for you to

get computer access versus just access to the hard copy?

Ms. SANDERS. Well, with close to 2,000 facilities it made it a little bit easier to do planning if you could do it through computer

than having to go actually pull a hard copy.

Ms. DEGETTE. It is hard to do that to the hard copy, is it not?

Ms. SANDERS. Correct. Yes. There are times——

Ms. DEGETTE. A job I once actually did it recently, and it is hard.

Did you ever get your computer access back?

Ms. SANDERS. Yes, I did.

Ms. DEGETTE. How long were you without that access?

Ms. SANDERS. I was probably without it for about 2 or 3 months.

I know that I finally went and talked to Tony Tanner about it and

he said that he would help me with talking to Mike about it. And

we did get that access turned on.

Ms. DEGETTE. And Mike never gave you or Tony an explanation

as to why that access was revoked?

Ms. SANDERS. I do not know if he gave it to Tony or not. I know

he did not give it to me.

Ms. DEGETTE. Did you ever tell Mr. Scrushy about that, about

the denial of the access?

Ms. SANDERS. No, I did not. No. No.

62

Ms. DEGETTE. Mr. Cullison, I wanted to ask you some questions.

You set up the Compliance Department at HealthSouth, did you

not?

Ms. CULLISON. Yes.

Ms. DEGETTE. Had you ever done that before?

Ms. CULLISON. No.

Ms. DEGETTE. Okay. And who asked you to do that?

Ms. CULLISON. I was approached by Teresa Sanders, who was my

supervisor in the internal audit department. And she told me that

they were looking at developing this program and asked if I would

be interested.

Ms. DEGETTE. Okay. And the company hired Strategic Management Systems to assist you in developing compliance policy and

procedures, is that right?

Ms. CULLISON. Correct.

Ms. DEGETTE. And that company is headed by Richard

Kusserow, a former Inspector General of the Department of HHS,

as far as I know, is that right?

Ms. CULLISON. Correct.

Ms. DEGETTE. Now, if you will look at Tab 98 in the notebook

there. He sent a letter to you on December 3, 1997 and do you recognize that?

Ms. CULLISON. Yes.

Ms. DEGETTE. Did you receive that?

Ms. CULLISON. Yes.

Ms. DEGETTE. Now in that letter it says that there are occasions

that would arise when the legal counsel needed to direct the issue

resolution process and that HealthSouth needed a policy on when

to do that. Is that correct?

Ms. CULLISON. Correct.

Ms. DEGETTE. And Mr. Kusserow provided that kind of protocol,

right?

Ms. CULLISON. Yes.

Ms. DEGETTE. What it said is when there are allegations of

criminal law violations the legal counsel should be notified immediately and that the legal counsel should conduct the investigation,

evaluate the facts and evidence and to determine whether a criminal violation may have occurred and determine how to handle the

issue. Is that right?

Ms. CULLISON. Correct.

Ms. DEGETTE. And do you know did the compliance office adopt

those protocols?

Ms. CULLISON. I remember that we went through the process of

reviewing the draft policies that SMS presented to us. I do not, on

the other hand, remember which ones wee adopted. I do not recall

which ones were adopted.

Ms. DEGETTE. Who was in charge of adopting the protocols?

Ms. CULLISON. Ultimately it would have been the compliance officer, Tony Tanner.

Ms. DEGETTE. And is it your belief that the protocol between the

compliance office and legal counsel was adopted, that specific one?

Ms. CULLISON. I do not recall if that specific one was adopted or

not.

Ms. DEGETTE. Did you ever utilize those procedures?

63

Ms. CULLISON. The procedures that were adopted we had in our

office and we had access to——

Ms. DEGETTE. But you do not remember which ones they were?

Ms. CULLISON. I do not recall which ones specifically were, yes.

Ms. DEGETTE. But did you ever refer anything to legal counsel?

Ms. CULLISON. I did on an informal basis, yes.

Ms. DEGETTE. Okay. And that would be, I suppose, contemplated

by the protocol on the compliance office?

Ms. CULLISON. Right.

Ms. DEGETTE. Now, Ms. Henze alleged fraud, which is a criminal

violation. Did you alert the legal counsel?

Ms. CULLISON. I did not alert them at that time.

Ms. DEGETTE. Okay. Did you suggest to Mr. Tanner that he call

in legal counsel about these allegations?

Ms. CULLISON. I do not recall doing that.

Ms. DEGETTE. Okay. And why not?

Ms. CULLISON. Probably at the time I felt that that would have

been a call better made by him.

Ms. DEGETTE. So you thought that he would do it?

Ms. CULLISON. Right.

Ms. DEGETTE. Now, Ms. Henze suggested that you do some computer queries to see if what she said was accurate. Did you do

those queries?

Ms. CULLISON. Yes.

Ms. DEGETTE. And what did you find?

Ms. CULLISON. I found after running those queries, I found some

large dollar amount journal entries that were consistent with what

she had brought to me.

Ms. DEGETTE. And did you give those, the results of those queries to Mr. Tanner?

Ms. CULLISON. Yes.

Ms. DEGETTE. What happened then?

Ms. CULLISON. At that point, that was when he informed me that

he was going to look into it.

Ms. DEGETTE. And did you ever follow up with him to see what

he had done?

Ms. CULLISON. I did not get the details of his investigation. The

only response I received or the only response that I was given was

that the matter had been looked into.

Ms. DEGETTE. So you never knew anything more than that?

Ms. CULLISON. No.

Ms. DEGETTE. Was this the standard way that you operated?

Was this unusual?

Ms. CULLISON. This was an unusual type of case. Generally he

would not have been involved in an investigation. But due to the

high level of management that was involved in the allegations, it

was not unusual that it would have gone to him.

Ms. DEGETTE. And also the credibility of Ms. Henze, which I

think you have said was impacted?

Ms. CULLISON. Exactly. Right.

Ms. DEGETTE. Now, so how many times do you think you took

situations like this to Mr. Tanner?

After consulting with counsel, your answer?

64

Ms. CULLISON. Right. We only had the one allegation of fraud,

of a fraud nature from Diana, and that was the only one that went

to Mr. Tanner. The only one that we received.

Ms. DEGETTE. Were there any other issues that you thought

were big enough to take to Mr. Tanner?

Ms. CULLISON. For example, I remember a sexual harassment

situation that went to Mr. Tanner because of the high level of management that it involved as well.

Ms. DEGETTE. So it was very unusual?

Ms. CULLISON. Right.

Ms. DEGETTE. Yes. And the sexual harassment situation, Mr.

Tanner also found that the allegations were unsubstantiated, is

that not correct? That was his initial finding?

Ms. CULLISON. I think through the course of his investigation

that case was put to rest as well.

Ms. DEGETTE. Now, do you know if the board of directors was

ever made aware of this high level complaint against the senior officials of the company?

Ms. CULLISON. I do not know that they were made aware of it.

Ms. DEGETTE. And what happened to the records in this case?

Ms. CULLISON. We had a policy within the compliance department that once a case had been closed, it would remain in our system for 90 days and then it would be purged from our system. And

the only thing that would remain as a record of that case was general information like the date of the call, whether—you know, what

type of call it was but not specific information.

Ms. DEGETTE. And so do you know if those records still exist

anymore?

Ms. CULLISON. Yes, they do.

Ms. DEGETTE. I do not have anymore questions, Mr. Chairman.

I just—I want to add my thanks to all the witnesses for coming

forward. But I also want to add I have been here for all of these

corporate responsibility hearings. And I think that if there is any

one thing that the testimony today and the testimony we have been

hearing for a couple of years should teach is is that when employees of a company see something wrong, they really need to find a

way to take it to places other than their immediate supervisors,

who are often the ones that are guilty of the wrongdoing.

And I was thinking about this over the lunch break. In so many

of these cases what we have had is a very charismatic powerful

leader of a company. Enron, Qwest, ImClone. And the employees,

even if they see wrongdoing are afraid to take it outside the normal

channels. So I think probably all of you have learned a good lesson,

and I know we certainly have. And I would hope that throughout

corporate America employees would be sitting there saying today,

you know, if I am seeing some wrongdoing, I have some kind of

duty to bring this up and not just to the people who are committing

the wrongdoing.

So, those are just my thoughts.

And, again, I want to thank everybody here. Because I know everybody here has tried to work the best that they could within the

system. And I do appreciate your testimony.

Mr. GREENWOOD. The Chair thanks the gentlelady.

65

The gentleman from Oregon, Mr. Walden is recognized for 10

minutes.

Mr. WALDEN. Thank you, Mr. Chairman.

Ms. Sanders, I have a question for you and it relates to the audits by Ernst & Young. Do you think it was appropriate to classify

the Pristine Audits as audit related services?

Ms. SANDERS. As audit related services?

Mr. WALDEN. Yes.

Ms. SANDERS. Like financial audit related services?

Mr. WALDEN. Right.

Ms. SANDERS. No, I do not.

Mr. WALDEN. And yet it was done that way, right?

Ms. SANDERS. To my knowledge, that is what I have heard.

Mr. WALDEN. Yes. It does not seem right to me. It is sort of a

white glove test to see whether the trash is—what all did they do?

Trash taken out, rooms clean?

Ms. SANDERS. Right. The reception is friendly.

Mr. WALDEN. I mean, that’s a function.

Ms. SANDERS. Right. Business license posted. I mean, it was very

generic. Things that someone could walk in the door and be able

to do and check yes or no on.

Mr. WALDEN. Why would they have classified them as audit related?

Ms. SANDERS. I do not know. That was my——

Mr. WALDEN. Does anyone on the panel know that? The answer

to that?

Does anyone on the panel know if the board meetings were

taped, given the hidden cameras and microphones and the fact, I

understand Mr. Scrushy even had a tape recorder going in his pickup, I understand? His folks here were handing out copies of those

tapes gratuitously out here in the lobby earlier. Do you know if the

board—we do not have minutes from the board meetings. They

could not keep track of that, but they could, you know, wire his

pick-up. Do you know, were any of these board meetings taped?

Ms. SANDERS. No.

Mr. WALDEN. All right. Mr. Cohen, can you refer to Tab 27,

please sir, in the document binder? This was taken from the transcript of HealthSouth’s conference call to discuss third quarter results. You will see beginning on line 4 Mr. Scrushy states: ‘‘I would

like to begin by saying the third quarter was a challenging quarter

for the company. The introduction of Transmittal 1753 certainly

had an impact on the company.’’

In your opinion was the estimated impact of Transmittal 1753

going to have an immediate revenue impact on the company, and

if not, why? And I know we have touched on this earlier, but I

would like to go back to it?

Mr. COHEN. Based on what we found while we were there, there

had not appeared to be any guidance given to the field as to how

to code. We did find one memo that had gone out telling everybody

to begin using group codes.

Mr. WALDEN. Right.

Mr. COHEN. However, when we talked to people in the field, people fairly well admitted they disregarded that memo. Because they

thought it was inappropriate advice.

66

On about September 13 CMS did hold an open forum where they

discussed more about the different scenarios and how the coding

could take place. And after that we would have expected to see

some impact. And, indeed, when we did look at the end of September, we saw some impact. But, as I said before——

Mr. WALDEN. But as of that conference call?

Mr. COHEN. We did not study earlier in the third quarter. Based

on our conversations we would not have expected to see a significant amount of change in the way coding was done and certainly

through that period of time we found a dominus amount of impact

in how people coded commercial, and that was mainly out of the

hospital division.

Mr. WALDEN. And the commercial was the biggest part of the

book of business, was it not?

Mr. COHEN. Yes, and that was—it was also the toughest part to

figure out what would happen long term as to how they would respond to a change in Medicare.

Mr. WALDEN. Okay. How much was FTI paid to perform the

analysis of the impact of Transmittal 1753 on HealthSouth’s revenue, and for that amount of money did HealthSouth board of directors receive a final product with the analysis FTI had performed?

Mr. COHEN. We received, I believe, around $1.4 million.

Mr. WALDEN. All right.

Mr. COHEN. To prepare to the analysis.

Mr. WALDEN. Did the board ever see a final product?

Mr. COHEN. They never saw a final product. They never saw—

they were never given a report from us because we told the counsel, we were working for counsel, a report went to Fulbright.

Mr. WALDEN. Right.

Mr. COHEN. I do not know if they then subsequently shared the

draft that we gave Fulbright with the board.

Mr. WALDEN. Right.

Mr. COHEN. But we did indicate to Fulbright as well as we indicated to the company that unless we resolve—until we were able

to resolve the discrepancies we saw, we were not going to take that

report to final.

Mr. WALDEN. And those discrepancies required additional information which you sought?

Mr. COHEN. Yes.

Mr. WALDEN. And you sought that from Mr. Scrushy?

Mr. COHEN. No. We sought—I sent—we worked entirely through

Bill Owens while we were there in terms of coordinating data.

Mr. WALDEN. And who did he report to?

Mr. COHEN. Mr. Scrushy.

Mr. WALDEN. Thank you.

Mr. COHEN. And we sent a—I sent a note to him, an email on

November 6.

Mr. WALDEN. Right.

Mr. COHEN. Listing out the discrepancies and then also requesting of him certain information and indicated the information that

we needed in order to complete that.

Mr. WALDEN. And Mr. Owens never got back to you?

67

Mr. COHEN. He never got back. Counsel was also notified of the

information that there was a discrepancy and we needed further

information.

Mr. WALDEN. Okay. And did the counsel ever pursue it that you

are aware of?

Mr. COHEN. There were two groups of counsel that we were dealing with at the time. We were engaged by Fulbright & Jaworski.

I do not know what Fulbright & Jaworski did with that information. I am not aware of what conversations they may have had.

Mr. WALDEN. How much would it have cost you to finish the report?

Mr. COHEN. The second counsel that we talked to was Lanny

Davis with Patton Boggs. He had asked us for a memo detailing

remaining cost to finish the report.

Mr. WALDEN. Right.

Mr. COHEN. That he said he wanted to discuss with Mr. Scrushy.

The whole report including reporting to the board, etcetera, was

somewhere around $100,000 to just do the work that we needed to

confirm that number——

Mr. WALDEN. About 116, I think.

Mr. COHEN. Right. Somewhere in that neighborhood. Just to do

the work that we need to confirm the numbers in the report was

probably somewhere in the 40,000 or 50,000 range.

Mr. WALDEN. So you could have completed your report for that

amount, is that correct?

Mr. COHEN. Yes.

Mr. WALDEN. And they had already spent a million dollars on

you?

Mr. COHEN. A million four.

Mr. WALDEN. A million four? And for another, no more than

40,000 confirm another 116 altogether including the 40 you could

have wrapped it up?

Mr. COHEN. That is correct.

Mr. WALDEN. Do you think that asking for this additional information it may have caused some—to suggest it might be not in

their benefit to have you finish that report?

Mr. COHEN. At the time, since it was an insider—insider trading

investigation, we figured they were going to want that report finished.

Mr. WALDEN. But who asked for the report to begin with through

the law firm?

Mr. COHEN. Well, the law firm at the behest of—they were engaged by the board.

Mr. WALDEN. By the board or Mr. Scrushy?

Mr. COHEN. I believe they were engaged by the board. I might

be incorrect, but I believe it is by the board.

Mr. WALDEN. Okay.

Mr. COHEN. And the law firm engaged us then to do one component of their overall assessment, and that was to test the validity

of the $175 million assertion.

Mr. WALDEN. And so you go through all this process, the board—

let me understand this. The board asks the law firm to do this

study and you never end up finishing the study and the board

never sees it?

68

Mr. COHEN. I do not know if the board ever saw the draft or not,

but I never did complete the study.

Mr. WALDEN. Who was Lanny Davis retained by?

Mr. COHEN. I do not know. At some point we had conversations

with Lanny. Lanny had indicated that he retained by the company.

And I am telling you what I recollect, and that is I had heard he

was retained as a crises manager. Do not ask me what that is.

Mr. WALDEN. So they thought they might have a crises on their

hands. What a concept.

Mr. Smith, I want to go to you because you’re still there, right?

Mr. SMITH. Yes.

Mr. WALDEN. The auditing officer. And the auditing committee

at the board doesn’t talk to you?

Mr. SMITH. I talk directly—I talk weekly with Mr. May, CEO of

the company. But I have not talked with the audit committee.

Mr. WALDEN. That’s phenomenal.

Mr. SMITH. They get reports from me on audits, but I have not

had a one-on-one——

Mr. WALDEN. They do not call you in, you do not sit down, you

do not make your report to them independent——

Mr. SMITH. No.

Mr. WALDEN. [continuing] of the CEO?

Mr. SMITH. I have not met them, no.

Mr. WALDEN. They did not do that the last time either, right,

under Mr. Scrushy? Did they meet independently with their own

auditors?

Ms. SANDERS. No, sir, they did not.

Mr. WALDEN. What kind of board is this? This is outrageous.

Ms. Sanders, going back to the amount of money charged by

Ernst & Young, Tab 44, are you surprised the amount charged for

the Pristine Audit was so much higher than the amount charged

for the annual audit?

Ms. SANDERS. After seeing this document, yes sir, I am. I’ve not

seen——

Mr. WALDEN. I’ll let you get to Tab 44. You’ll see in the year

2000 the annual audit cost $939,400 plus the quarterly reviews of

87, so a million 27,000 let us say in 2000; a million 165,000 in 2001

for the audit. And then for the Pristine Audits it is a million and

a quarter for 2000 and a million 330,000. So they basically were

spending more to check the trash cans than to check the books?

Ms. SANDERS. That—that would appear so, yes, sir. I was not

there, though, during these years.

Mr. WALDEN. You were not there during these years?

Ms. SANDERS. I had—no, sir. I had left in 1999.

Mr. WALDEN. On, that is right. I’m sorry. So you do not know

who prepared these figures?

Ms. SANDERS. No, sir. I do not.

Mr. WALDEN. All right. Let us see, let us go back to Mr. Cohen.

Would you please refer to Tab 35 in our binder? Attached to this

email is a document entitled ‘‘Fee Estimate for Remaining Tasks’’.

On the line total remaining fees and expenses you have 116,756.

So that was the estimate we were just talking about.

Mr. COHEN. That is correct.

69

Mr. WALDEN. Okay. Was there some push back from

HealthSouth on the additional cost involved?

Mr. COHEN. They had pushed back on the overall bill. On the additional cost, we never got—we never got any response.

Mr. WALDEN. Did they pay the million dollar bill? The million

and a half?

Mr. COHEN. Yes, they did. Yes.

Mr. WALDEN. So they had already invested $1.4 million to find

out if there was some problem internally, but they did not want to

see the final result? Well, they did not want to pay you to finish

your work?

Mr. COHEN. They certainly for whatever reason did not provide

us the information we needed to complete a final report.

Mr. WALDEN. Have you subsequent to that ever seen the information?

Mr. COHEN. No.

Mr. WALDEN. Okay. All right. Did anyone at HealthSouth, either

employee or board member, request to see FTI’s analyses before it

was completed?

Mr. COHEN. The only contact we had with the board was a very

early meeting where we met with, I believe it was Bob May just

wanted to know what we were doing. Never had any contact after

that.

We anticipated we would be—when we completed it, we would be

making a presentation to the board. But since we never completed

the report that never happened.

As a normal course we had planned on going down to

Birmingham——

Mr. WALDEN. Right.

Mr. COHEN. [continuing] to meet with Bill Owens and the remaining senior staff that we had worked with to go through the report with them and make sure there were not any glaring

mistakes——

Mr. WALDEN. Sure.

Mr. COHEN. [continuing] or things that we had missed. That

never occurred because they did not respond to us to the November

16——

Mr. WALDEN. For the additional information?

Mr. COHEN. [continuing] for the additional information.

Mr. WALDEN. And that is pretty standard procedure, is it not?

You do other audits for other companies?

Mr. COHEN. Sure.

Mr. WALDEN. Is that correct? And is it not normal that an audit

committee you meet with them?

Mr. COHEN. You talking about the audit committee now?

Mr. WALDEN. Yes. I mean, I know there are several——

Mr. COHEN. Not related to this.

Mr. WALDEN. No, no, no. But just in general in the kinds of audits you do?

Mr. COHEN. Well, I am not an auditor, but I am certainly aware

of that, yes. Typically, we would be meeting with the audit committee.

Mr. WALDEN. Would that not be a standard corporate practice?

Mr. COHEN. Oh, yes.

70

Mr. WALDEN. In a well run company?

Mr. COHEN. Certainly.

Mr. WALDEN. The audit committee would have some independence from its management and you would report to that audit committee sometimes with management not there?

Mr. COHEN. Absolutely.

Mr. WALDEN. Especially if you saw a problem?

Mr. COHEN. It certainly has evolved over the years. I mean, if

you went back 10 years, what you are hearing today was probably

fairly normal course. But it has evolved over time to where it is

pretty much an independent practice where whoever is in charge

of internal audit will report directly to the audit committee of the

board.

Mr. WALDEN. Ms. Sanders, is that not what you do now? Report

independently?

Ms. SANDERS. I report—or reported when I worked with Eastern

Health System, yes. I reported directly to the CEO and also directly to the audit committee.

Mr. WALDEN. And you could meet with either separately and not

fear for your job?

Ms. SANDERS. Correct. I met on a quarterly basis alone with the

audit committee, yes.

Mr. WALDEN. But at HealthSouth you did not have that opportunity?

Ms. SANDERS. No, sir, I did not.

Mr. WALDEN. And at the other health company, I am sorry,

Eastern——

Ms. SANDERS. Eastern Health System.

Mr. WALDEN. Eastern Health. Did you have access to the corporate books as well as anything else you wanted to look at?

Ms. SANDERS. Yes, sir, I did.

Mr. WALDEN. But at HealthSouth you did not?

Ms. SANDERS. I did not, no.

Mr. WALDEN. So, I mean, maybe I am—well, it just strikes me

that there were firewalls put up to make sure that the people doing

the audits could never see everything they needed to see to get a

clear picture of whether or not these books were being manipulated. Is that an accurate picture from those of you were there who

are not there now?

Ms. SANDERS. We were hired to audit the field, and that is what

we audited. And, so that is—I mean——

Mr. WALDEN. Okay. I understand. Thank you very much.

Mr. GREENWOOD. The time of the gentleman has expired.

The gentleman from Michigan, Mr. Rogers is recognized for 10

minutes for inquiry.

Mr. ROGERS. Thank you, Mr. Chairman.

Ms. Sanders, I am just trying to understand this a little better.

Just for my own edification. When you were hired in 1990 were you

hired for internal audit functions or operational audit functions?

Ms. SANDERS. I was hired as the internal auditor, but it was very

well defined by Mr. Scrushy that I was hired to audit the field and

it was the financial audit of the field, the financial information that

they would be submitting to the corporate office to post to their

general ledgers which would generate the financial statement.

71

Mr. ROGERS. So you were more in the facilities? You were not for

the corporate finances, if you will?

Ms. SANDERS. Correct. Yes.

Mr. ROGERS. Okay. And it is my understanding there is no law

or was not a law at the time that set any parameters for what an

internal auditors could or should or would do according to the specifics of the law, is that correct?

Ms. SANDERS. Correct.

Mr. ROGERS. Okay. So they could define by law any type of system that they wanted to do, including one where you were excluded

from the finances of the corporation and only did operational auditing, is that correct?

Ms. SANDERS. Correct, yes.

Mr. ROGERS. You testified earlier that rumors were circulating as

to fraud that raised some concern for you. Now you did not see anything within your audit purview in the facilities that indicated to

you that there would be fraud, is that correct?

Ms. SANDERS. That is correct.

Mr. ROGERS. But you heard a rumor that there may be some

fraudulent activity?

Ms. SANDERS. I heard that they—they heard the rumor that they

were playing with the numbers.

Mr. ROGERS. Can I ask, how did you hear that rumor? I mean,

how would you come about that kind of information?

Ms. SANDERS. I heard it once from a controller at one of the hospital. She did not elaborate on how they were playing with the

numbers or exactly what she was talking about. It was a just comment that was made.

And then I also heard it from a senior person at the corporate

office.

Mr. ROGERS. And I am at a point in your testimony here from

the asset freeze hearing. And the question was posed ‘‘So you have

got rumors circulating of some notions about fraud going on. You

are the in-house auditor of the company and you did nothing about

it?’’ End of question.

Answer: ‘‘You could look at it that way, yes sir.’’ So what you

were saying then is that you did not feel that there was anywhere

that you could go to talk about that information, is that correct?

Ms. SANDERS. I did not really have any documented information

to take to be able to investigate and see if the rumors were valid.

Mr. ROGERS. So you had no direct knowledge?

Ms. SANDERS. Correct.

Mr. ROGERS. Okay. And you also said that you heard even apparently these Pristine Audits, but you had no direct knowledge of the

operation of Pristine Audits, did you?

Ms. SANDERS. No. I had—I had the direct knowledge of the Pristine Audits. I did not have direct knowledge of where they were

classifying the expenses on the financial statements. That was not

part of my function. It was always intended to be a quality standards program; that was what the original proposal was.

Mr. ROGERS. Now, was the scope of your responsibility known

both to the senior officers and those below you in the different

functions of the compliance department and other places? They

72

knew that your function was separate from the financial auditors,

or did they?

Ms. SANDERS. I do not know that they really knew that there

was a separation between the two of us. I do know that they knew

that I was responsible for doing the field audits, yes.

Mr. ROGERS. At anytime did you talk to the external auditors

about your concerns about these rumors that you were hearing?

Ms. SANDERS. No, I did not. And the main reason that I did not

is there was not anything to substantiate that the rumor was even

valid, and I would not have felt comfortable going either up the

chain to senior level management to the external auditors without

something to back up the rumors. I have heard these rumors, I

have got documentation to prove it exists.

Mr. ROGERS. To some degree you were a victim as well by the

numbers that you were getting in your operational audits as well?

Ms. SANDERS. Correct. Yes.

Mr. ROGERS. Okay. So, and I would assume you are a consummate professional and you take your job very seriously. Obviously,

you have had the courage to testify today. It can happen in these

companies, can it not? If there is that much fraud and that much

conspiracy, that widespread and throughout a corporation culture,

these internal audit operations can be fooled as well, cannot they?

Ms. SANDERS. Yes, they can. They teach us that in our initial auditing courses and any of our certified fraud training, and any of

that. If there is collusion in a company, there is not anything that

you can do to detect that.

Mr. ROGERS. This is just more of a gee wiz question for me. The

SEC has just come out to require listed companies to have an internal audit function. And prior to that the language is ‘‘an effective

internal control.’’ Big difference there, do you not think, in your

role as a professional?

Ms. SANDERS. Yes.

Mr. ROGERS. And do you think it would help in the future for

these companies, make it a little bit more difficult for professionals

like you if you can be fooled to have an internal audit function as

opposed to an open ended effective internal control? Do you think

that would be effective?

Ms. SANDERS. Yes, it would.

Mr. ROGERS. I mean, that is something that we will be looking

at as a result of these hearings.

And I hope you all understand, I am just understanding it myself

to make sure that any action that we take here, make sure that

we go after the bad guys, the folks who are causing these problems.

And I just, again for the record, there is no time that you went

to either internal operations or external operations to say hey there

is a—we have a fraud problem here? And mainly because you did

not know, accordingly to your testimony?

Ms. SANDERS. I did not know. No, sir. The only—only comments

that I made were to Mr. Scrushy during my exit conference that

there were—I was having issues with Mike Martin, that he had

turned off my access. We had gotten that turned back on. And he

asked me why I felt like Mike had done that. And we got into a

discussion about Mike and the CFO. So——

73

Mr. ROGERS. Okay. In your history as an auditor in other places,

was it unusual that you would do this operational audit only or is

that something that a company that might——

Ms. SANDERS. It is not unusual.

Mr. ROGERS. Not unusual?

Ms. SANDERS. No.

Mr. ROGERS. I am going to open it up to the panel. I am still trying to understand the culture of fear that we have heard from

many of the employees, or at least from testimony that we have

gleaned from the past. And I am wondering if anybody can tell me

other than something that we have talked about earlier today, that

might help me understand completely this culture of fear that

would even when you got to the point where you really understood

that this—you were participating, quite frankly, in a fraudulent act

that maybe this is not my place or my time to relay that information to either a superior or an external operation either through

the hotline compliance, Ernst & Young or others. And I am going

to open end that question to anybody.

Ms. DEGETTE. Will the gentleman yield?

Mr. ROGERS. Yes.

Ms. DEGETTE. I would assume you are not trying to get any of

the panel members to admit to participating in a fraudulent act?

Mr. ROGERS. No, absolutely not.

Ms. DEGETTE. That makes me be nervous when you say that.

Mr. ROGERS. No. I mean, other than some of these folks were, obviously, participating in acts and why they are cooperating witnesses at this point because they had firsthand knowledge of those

activities. And, obviously, something in them said, hey, I am going

to do my best. But what was that culture? I am more the culture

of fear than your activity. I am not really interested in you telling

me what you did other than what was that fear factor that said I

am not going to take the extra step to go? That was—I am just curious. I want to understand the culture of fear in this company that

got to us to where we are today. It existed.

Nobody wants to step up to that one?

Thank you, Mr. Chairman. I have no further questions.

Mr. GREENWOOD. The Chair thanks the gentleman.

Before I excuse this panel, just two more questions.

Ms. Henze, you are the assistant controller of HealthSouth today.

Do you see a difference between the company, the way the company was run when Mr. Scrushy was there versus the way it is operating now under new management?

Ms. HENZE. Yes, sir.

Mr. GREENWOOD. Could you describe that difference?

Ms. HENZE. Just the general atmosphere is a lot more relaxed.

It seems to be a lot more open door. Mr. Bob May is the acting

CEO and, you know, I have—there is many occasion. I have seen

him in the cafeteria, walked up to him, gone to his office just said

‘‘hey, something that never occurred.’’

I mean, the little things. Like there was a private entrance that

only Mr. Scrushy could come into the company campus. As soon the

new leadership came, they opened it up to everybody so all employees could use any entrance that was available.

74

They allowed us now to go out on the back deck. Just a nice little

deck where you can stand by the waterfall. We were not really—

we were—I do not know if hinder is the right word, but discouraged from going out there and standing. We are allowed to go out

there now.

There is picnic tables.

I mean, it is just a lot nicer atmosphere and——

Mr. GREENWOOD. And how about the financial?

Ms. HENZE. Oh, I am sorry.

Mr. GREENWOOD. That is quite all right. That is all very interesting. But how about the financial position of the company? Do

you feel confident that it is going to be able to survive this?

Ms. HENZE. Yes, I do.

Mr. GREENWOOD. Okay.

You all have long been involved with this company, and you all,

I think, were here when Mr. Scrushy was here. My guess is you

have all seen the ‘‘60 Minutes’’ tape in which Mr. Scrushy says that

he is perfectly innocent, he did not know about any of these shenanigans, did not know that the books were being falsified. He had

the terrible bad luck to hire 5 corrupt CFOs in a row and 10 other

company executives who hide all of this behind his innocent back.

Do any one of you based on Mr. Scrushy’s management style as

you have known it, does anyone of you believe him? Okay.

Thank you for coming. And thank you for your time and for you

openness, and for your willingness to try to do the right thing.

You are excused.

Okay. We now call forward our third and final panel of witnesses

consisting of: Mr. William Horton, Former Executive Vice President

and Corporate Counsel of HealthSouth Corporation; Mr. Brandon

Hale, Former Executive Vice President of Administration, Corporate Security and Compliance Officer from HealthSouth Corporation; Mr. James Goodreau, Former Chief of Security, HealthSouth

Corporation, and; Mr. Anthony Tanner, Founder and Former Corporate Secretary and Compliance Officer at HealthSouth Corporation.

Gentleman, we welcome you.

Okay. Again, we welcome you. I think you have observed from

the other panels that it is the practice of this subcommittee to take

testimony under oath. Do any of you object to giving your testimony under oath this afternoon? Okay.

Seeing no such objection, I need to let you know that pursuant

to the rules of this Committee and the House, you are entitled to

be represented by counsel. Do any of you wish to be represented

by counsel today?

Mr. Horton? You need to pull your microphone over and turn the

button on. Try now. There you go.

Mr. HORTON. Thank you, Mr. Chairman.

My counsel William Baker and Tamara Smith are behind me.

Mr. GREENWOOD. Okay. Would you gentlemen raise your hands.

Thank you.

Mr. Hale?

Mr. HALE. Mr. Chairman, my attorney is David Burn and Paige

Jackson are behind me.

Mr. GREENWOOD. Okay. Welcome.

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Mr. Goodreau?

Mr. GOODREAU. Mr. Chairman, my attorney Fred Sinclair is behind me, sir.

Mr. GREENWOOD. Very well, sir.

Mr. Tanner?

Mr. TANNER. Mr. Chairman, my attorney Jack Sharman is behind me.

Mr. GREENWOOD. Okay. Mr. Tanner, I need to ask you, do you

have any difficulty rising to——

Mr. TANNER. It would be easier——

Mr. GREENWOOD. All right. I am going to ask Mr. Horton, Mr.

Hale, Mr. Goodreau to stand and Mr. Tanner to just raise your

right hand as they do.

[Witnesses sworn.]

Mr. GREENWOOD. Okay. You are under oath.

And, Mr. Horton, do you have an opening statement?

TESTIMONY OF WILLIAM HORTON, FORMER EXECUTIVE VICE

PRESIDENT AND CORPORATE COUNSEL, HEALTHSOUTH

CORPORATION; BRANDON HALE, FORMER EXECUTIVE VICE

PRESIDENT OF ADMINISTRATION, CORPORATE SECURITY

AND COMPLIANCE OFFICER, HEALTHSOUTH CORPORATION;

JAMES GOODREAU, FORMER CHIEF OF SECURITY,

HEALTHSOUTH CORPORATION; AND ANTHONY TANNER,

FOUNDER AND FORMER CORPORATE SECRETARY AND COMPLIANCE OFFICER, HEALTHSOUTH CORPORATION

Mr. HORTON. Mr. Chairman, I am Bill Horton from Birmingham,

Alabama. I was formerly Executive Vice President and Corporate

Counsel of HealthSouth. Pleased to be here today and try to answer any questions the subcommittee may have.

Mr. GREENWOOD. Mr. Hale, do you have an opening statement?

TESTIMONY OF BRANDON HALE

Mr. HALE. Mr. Chairman, I do not have an opening statement

prepared. I am the former Executive Vice President of Administration, and I am here to answer questions today.

Mr. GREENWOOD. Yes, sir.

Mr. Goodreau?

TESTIMONY OF JIM GOODREAU

Mr. GOODREAU. Mr. Chairman, I am Jim Goodreau, and I was

the former Chief of Security for HealthSouth. And I am here to answer any questions you have to ask.

Mr. GREENWOOD. Okay.

And Mr. Tanner?

TESTIMONY OF ANTHONY TANNER

Mr. TANNER. Mr. Chairman, I am a founder and a retired Executive Vice President of the company, and I have no formal statement.

Mr. GREENWOOD. Okay. The Chair recognizes himself for 10 minutes for inquiry. And let me start with Mr. Hale.

Mr. Hale, as Corporate Secretary were you responsible for keeping the minutes at board meetings?

76

Mr. HALE. That is right.

Mr. GREENWOOD. Okay. And once a board meeting was over,

what was your process for organizing the minutes?

Mr. HALE. The minutes would be prepared. I would take my

notes for the minutes, handwrite a draft of those minutes. Send

those to Mr. Horton’s office. Those would be typed and prepared by

his assistant. Would come back to me. I would review and send

back to Mr. Horton for his review. And then they would be sent—

signed by me and sent to Mr. Scrushy for his approval and distributed to the board.

Mr. GREENWOOD. Before I asked this next question, one of the

panel members asked if the board meetings were videotaped or

audiotaped. To your knowledge, were they, Mr. Hale?

Mr. HALE. To my knowledge, no.

Mr. GREENWOOD. Okay. Mr. Tanner, do you know if the board

meetings were video or audiotaped?

Mr. TANNER. Not to my knowledge, sir.

Mr. GREENWOOD. Okay. Anyone else have any knowledge with

regard to that? Okay.

Back to you, Mr. Hale. Was Mr. Scrushy given the opportunity

to review the minutes before they were provided to board members?

Mr. HALE. He was given the opportunity to review the minutes,

yes.

Mr. GREENWOOD. Before they were given to the board members?

Mr. HALE. Before they were given——

Mr. GREENWOOD. And why was that?

Mr. HALE. For his signature before they went to the board.

Mr. GREENWOOD. Did Mr. Scrushy ever make alternations to the

minutes before you provided them to board members?

I do not think your button is on.

Mr. HALE. It was very rare that he would make any changes or

suggestions to the minutes. I remember a couple of occasions, but

that is all.

Mr. GREENWOOD. Do you remember the substance of those

changes?

Just leave it on.

Mr. HALE. Okay. Sorry. That is a lot easier. Thank you.

Mr. GREENWOOD. Yes.

Mr. HALE. It was in the August—I think the August 30 meeting

of 2000 he added a little clarity with regard to the Transmittal

1753 statement or the addressing the timeframe of that. I think

the comments, I would need to refer to it to be certain, but added

in there comments that he was advised by Mr. Owens of Transmittal 1753 on August 6 and referenced the potential impact initially estimated at $15 to $20 million. It is not exact words, but

something to that effect.

Mr. GREENWOOD. Did you find it inappropriate that Mr. Scrushy

could edit the minutes at will?

Mr. HALE. He could not edit at will. I mean, that was something

that was stated in the meeting, and I agreed to it. I mean, if it was

not done in the meeting, I would not agree to adding it. No, sir.

77

Mr. GREENWOOD. Okay. So it is your testimony that Mr. Scrushy

never added anything to the minutes that, in fact, did not reflect

what happened at the board meeting?

Mr. HALE. Not the minutes that I prepared, no.

Mr. GREENWOOD. Nor did he delete anything from minutes that

in fact did occur, words that were spoken?

Mr. HALE. Not to my knowledge.

Mr. GREENWOOD. Okay. Were you present at the executive sessions?

Mr. HALE. I was—occasionally I would be asked to stay in the

executive session. Normally I would not be.

Mr. GREENWOOD. Okay. And were there separate minutes for the

executive sessions?

Mr. HALE. Any—any notations in the minutes from executive

sessions would have been given to me from Mr. Scrushy to add to

the minutes.

Mr. GREENWOOD. And how would you know if they were, in fact,

accurate?

Mr. HALE. Well, they would be distributed to the board.

Mr. GREENWOOD. But is it not true that frequently there were

minutes that the board never saw and never reviewed? Never approved?

Mr. HALE. The minutes were distributed to the board.

Mr. GREENWOOD. In every instance?

Mr. HALE. The ones I did were distributed, yes.

Mr. GREENWOOD. Okay.

Mr. HALE. Now there were some toward the final period that I

was taking minutes that were in various stages of drafts and production. And those certainly might be in question.

Mr. GREENWOOD. Okay. Would you turn to Tabs 9 and 10 in the

binder on the table? And turn to pages 2, which carries over to

page 3 on Tab 9.

Did you prepare these minutes?

Mr. HALE. Yes, sir. I did.

Mr. GREENWOOD. Okay. I would like to read a few lines that

begin at the bottom of page 2 and carry over to page 3. ‘‘Mr. Owens

stated that he had believed the Transmittal—’’ I believe that refers

to the CMF transmittal about the 1753—‘‘might apply to the corporation’s outpatient services and freestanding outpatient centers.

He informed Mr. Scrushy on August 6 that it might apply to such

services in freestanding outpatient centers and the impact could be

$15 to $20 million.’’ Behind these typed minutes are your handwritten minutes, and that is in Tab 10. Do you see those?

Mr. HALE. Yes, sir.

Mr. GREENWOOD. Okay. And I note that there are two versions

of the handwritten notes. It looks like an earlier version and then

a more formalized version. Looking at both versions of your handwritten notes of the meeting on which you base these minutes, I

presume there was no mention of this $15 to $20 million figure?

Is that correct?

Mr. HALE. Sir, I remember that figure being mentioned in the

minutes. It is not in my notes. But it was a figure that was discussed.

Mr. GREENWOOD. Okay. So it is not in your draft notes?

78

Mr. HALE. Correct.

Mr. GREENWOOD. Not in the draft minutes?

Mr. HALE. That’s correct.

Mr. GREENWOOD. But then it appears in the final minutes?

Mr. HALE. That’s correct.

Mr. GREENWOOD. And that was as a result of Mr. Scrushy’s addition?

Mr. HALE. That is correct.

Mr. GREENWOOD. Okay. Did Mr. Scrushy ask you to put the figure into the minutes?

Mr. HALE. Yes. The figure was in his addition to the minutes.

Mr. GREENWOOD. Okay. So he said to—he reviewed your draft

minutes and then he asked you to add this language about the $15

to $20 million impact?

Mr. HALE. That is correct.

Mr. GREENWOOD. And you said I would do that, and you went

back and altered the minutes? Is that correct.

Mr. HALE. The minutes were still in the stage of being put together, and I made that adjustment because that—I did recall that

being statement in the meeting. Yes.

Mr. GREENWOOD. Because what?

Mr. HALE. I did recall that being stated——

Mr. GREENWOOD. You did not?

Mr. HALE. You did recall that being stated.

Mr. GREENWOOD. Oh, you did recall? So you have an independent

recollection of Mr. Owens stating during this meeting that he told

Mr. Scrushy on August 6 that the impact could be $15 to $20 million?

Mr. HALE. That is correct.

Mr. GREENWOOD. Okay. Would you turn to Tab X. I am sorry. Go

back to Tab 10. Okay.

Tab 10 you will find the August 8 board meeting minutes.

Mr. HALE. Tab 10 shows August 26 in my book. It is a different

tab.

Mr. GREENWOOD. All right. So stay on Tab 10 and go to pages

entitled ‘‘HHEC293-0469’’.

Mr. HALE. Okay.

Mr. GREENWOOD. And do you see about three quarters of the way

down your notes ‘‘Get with WTO and RMS to see what needs to be

added to board minutes.’’

Mr. HALE. Yes.

Mr. GREENWOOD. Okay. Could you tell us what that means to

you?

Mr. HALE. That was after I left, and you see above that you see

that all including me left the board. So that was to go with them

to find out if anything needed to be added to the minutes.

Mr. GREENWOOD. So it was your decision to do that or was it Mr.

Scrushy’s decision to do that?

Mr. HALE. I asked if there was anything else in executive session

that needed to be incorporated into the minutes.

Mr. GREENWOOD. Okay. Go to Tab 52, please.

Mr. HALE. Could I add one other thing? If you will see my note

below that where it states continue—discussion continued and then

motion approved with no votes against the motion. That is what I

79

was advised that actually what occurred after they went into executive session.

Mr. GREENWOOD. And you were advised that by whom?

Mr. HALE. By Mr. Scrushy.

Mr. GREENWOOD. Mr. Scrushy told you that that was what happened at the executive meeting and so you should put that in the

minutes?

Mr. HALE. That should be included in the minutes. Yes, that is

correct.

Mr. GREENWOOD. Okay. Is that in your view consistent the way

a secretary should conduct himself to just take the word of the

CEO that something happened at a meeting that you did not attend and drop it into the notes?

Mr. HALE. If it is noted in executive session that I was not in,

I thought that was appropriate. Yes, sir.

Mr. GREENWOOD. Okay. Did you ever have any question in your

mind as to whether you should just assume that anything that Mr.

Scrushy told you happened in the executive meeting actually happened in the executive meeting?

Mr. HALE. I did not question it at that time.

Mr. GREENWOOD. You did not question that?

Mr. HALE. I certainly would not have.

Mr. GREENWOOD. All right. Let us go to Tab 52. And do you see

that memorandum?

Mr. HALE. Yes, I do.

Mr. GREENWOOD. Okay. Why do you not tell us what this memo

indicates?

Mr. HALE. This is a memo——

Mr. GREENWOOD. This is a memo that you sent, right?

Mr. HALE. Yes. This is a memo, dated March 3, 2003 to Joe Gordon. It says ‘‘Enclosed please find board minutes for January 31,

2003, February 6, 2003, February 7, 2003, February 21, 2003.

Please review and we will discuss and finalize at the board meeting

in Orlando.

Mr. GREENWOOD. Okay. So what you did is you sent him the

board minutes for 5 separate meetings and you asked him to review them and then have discussion with you and finalize at the

board meeting in Orlando, is that right?

Mr. HALE. That is correct.

Mr. GREENWOOD. Now, is that common practice for you to send

the minutes off to—describe what Mr. Gordon’s role was?

Mr. HALE. Mr. Gordon was a director. This memo went to all the

directors. This is just a copy of the one that went to Mr. Gordon.

Mr. GREENWOOD. Okay. And why did you feel that it was appropriate to ask Mr. Gordon specifically to review those minutes and

decide whether they need to be altered or not?

Mr. HALE. Sir, these minutes went to all directors. This same

memo went to each director. This is just a copy of the memo that

went to Mr. Gordon.

Mr. GREENWOOD. So what was the normal procedure by which

the board would approve minutes?

Mr. HALE. The normal procedure for approval when I was secretary would be the minutes would be distributed to the board

members and they would sign their—the statement, the waiver on

80

the back, and that was acknowledgement that they received. Never

was it practice during—from December 1999 while I was the secretary to approve the minutes prior to the start of the next board

meeting. That was not a practice.

Mr. GREENWOOD. So most meetings have an early on in their

agenda approved the minutes from the last meeting. That was not

the standard practice at HealthSouth?

Mr. HALE. That was not the standard practice. No, sir.

Mr. GREENWOOD. Okay. We have been informed by board members from HealthSouth that there are still outstanding minutes

from board meetings that have still never been approved. Is that

so?

Mr. HALE. The—in March 2003 I ceased to take minutes for

board meetings. The attorneys from Skadden Arps took over that

responsibility. There were some minutes in stages of drafts and review with Mr. Horton that were never finalized.

Mr. GREENWOOD. But I am talking about minutes that were

taken at board meetings when you were still in your role as secretary and we are told by board members that there were minutes

from meetings that they have never approved that you took?

Mr. HALE. Yes, sir that is what I said. There were minutes that

were in stages of either my draft form or review of Mr. Horton that

were not finalized prior to that time and still have not been addressed.

Mr. GREENWOOD. And what is the normal turn around time for

you? There is a board meeting, you take the minutes, you draft—

you do a draft of the minutes. How long does it take to get that

through the process and approved?

Mr. HALE. That process should not take that long, but that process was taken away from my hands in March 2003.

Mr. GREENWOOD. But were there periods of time when before

that, before the date to which you just referred, that minutes went

5 months without being approved?

Mr. HALE. That sounds long. We were not quick in getting them

back, I will admit that. But I do not know of any that would be

missing.

Mr. GREENWOOD. Did you ever hear from the board members

complaining that they were unhappy with the fact that minutes

had not been provided to them for approval?

Mr. HALE. Not until after August 2002.

Mr. GREENWOOD. Okay. My time has expired. The gentlelady

from Colorado is recognized for 10 minutes.

Ms. DEGETTE. Well, Mr. Hale, before August 2002 how long was

it taking you to get the minutes out to the board members?

Mr. HALE. I do not recall exactly.

Ms. DEGETTE. At sometimes it was up to almost a year, was it

not?

Mr. HALE. I do not think so, no.

Ms. DEGETTE. And when you got the draft minutes out to the

board members, like the example here in Tab 52, did you ever get

comments back from executive committee members about things

that were in the minutes that you were not there and——

Mr. HALE. I do not recall any comments.

81

Ms. DEGETTE. So you never had anyone say no that was not

right or something else happened, right?

Mr. HALE. Not in the time period prior to that. And the examples

that I remember after August 2003 there was one comment from

Mr. May on clarification of some events in a meeting that were addressed.

Ms. DEGETTE. When was that?

Mr. HALE. That was in probably October 2002.

Ms. DEGETTE. And what was Mr. May talking about?

Mr. HALE. I do not recall specifically. I know there some confusion in—there was a meeting on October 22 with Fulbright & Jaworski that I was not in that some Fulbright attorneys were taking

the minutes for that meeting. I do not think those have ever been

completed or seen. I was not in that meeting. It was strictly executive session. And there was some confusion over what was presented at the meeting prior to that by Fulbright in that meeting.

Ms. DEGETTE. And the subject of that was the auditing, the financial reporting?

Mr. HALE. The Fulbright report and investigation.

Ms. DEGETTE. The report. Okay. Thank you.

Mr. Horton, I wanted to ask you some questions. If you can take

a look at Tab 98. That’s the compliance policies and procedures

that I was talking to Ms. Cullison about in the last panel. And I

wanted to ask you if you have ever seen these compliance policies

before?

Mr. HORTON. I do not recall seeing them before, ma’am.

Ms. DEGETTE. Now, were you familiar with the protocols of the

Compliance Department for investigating allegations of fraud?

Mr. HORTON. I am not sure—I am not sure what you mean by

the protocols.

Ms. DEGETTE. Well, did they have a protocol if there was an allegation of fraud.

Mr. HORTON. They had, I think, procedures that they followed.

I am not sure if by protocols you mean a written set of protocols.

Ms. DEGETTE. Okay. Well, what were their procedures?

Mr. HORTON. My understanding was, I think essentially as Ms.

Cullison said on the previous panel, if they got a call in on the hotline or any other sort of inquiry, they would sort of assess the nature of the problem whether it was in fact a compliance problem

or human resources problem, or something else. Route it down the

appropriate path.

Ms. DEGETTE. Okay. Now, as legal counsel was it your understanding that you should be contacted immediately if there were allegations of criminal activity?

Mr. HORTON. I would have expected that we would have been. I

do not know that there was a formal policy to that effect. But the

Compliance Department would not infrequently contact someone in

my department, you know, if in view of the Compliance Department they had an issue come in that——

Ms. DEGETTE. Let me ask you, was your department—was the

legal counsel’s office ever contacted by the Compliance Department

to notify you of an allegation of criminal activity?

Mr. HORTON. I do not recall any allegations of criminal activity.

Ms. DEGETTE. So, but you were never notified of that.

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Now, fraud is potential criminal conduct, is it not?

Mr. HORTON. Certainly certain kinds of fraud. Yes, ma’am.

Ms. DEGETTE. Yes. In fact, you know, as it turns out 15 people

have plead guilty to criminal fraud in this resulting from this company, right?

Mr. HORTON. There are 15 people who have plead guilty. Yes,

ma’am.

Ms. DEGETTE. And that was to a crime, right?

Mr. HORTON. Yes, ma’am.

Ms. DEGETTE. Okay. Now, in 1999 as we heard on the last panel,

Ms. Henze made a compliant to the Compliance Department that

there was fraud going on at the highest levels of HealthSouth. She

said, and she had some credible evidence to back it up as we heard,

that the financial chiefs at HealthSouth were making improper entries to the books at the end of each quarter to increase earnings.

This is a pretty serious allegation of criminal activity at a publicly

held company, is it not?

Mr. HORTON. Yes, ma’am. It is.

Ms. DEGETTE. And Ms. Cullison testified that she gave the complaint to Mr. Tanner, the Compliance Officer, to investigate. Mr.

Tanner has no experience in criminal investigations and under

HealthSouth’s protocol I would assume that he would be required

to bring that type of allegation to you. Would you assume that as

well?

Mr. HORTON. I am not aware of the protocol that she describes

some of.

Ms. DEGETTE. Well, would you think that Mr.—that if an employee came in and said there are serious fraud going on here and

I have the evidence to back it up, would you suspect someone

might have called you?

Mr. HORTON. That would certainly be a reasonable thing to do.

Yes, ma’am.

Ms. DEGETTE. I would think so. Did he bring it to you? Did he

call you and tell you about it?

Mr. HORTON. No, ma’am. Not that I recall.

Ms. DEGETTE. Until Ms. Henze testified in the SEC asset hearing earlier this year, had you ever heard of this allegation?

Mr. HORTON. No, ma’am. I had not.

Ms. DEGETTE. Did you hear about these rumors that some of the

witnesses on the second panel talked about that someone was cooking the books at HealthSouth? Did anyone ever bring that to your

attention?

Mr. HORTON. I do not recall any particular rumors that were

brought to my attention. No, ma’am.

Ms. DEGETTE. Okay. What would you have done if you heard

about those rumors as the legal counsel for the company?

Mr. HORTON. Certainly if—you know, if they were rumors that

appeared to have any substance or, you know, provided any information that would enable them to—enable someone to pursue

them, you know, I would have wanted to find out what was behind

them.

Ms. DEGETTE. What would have happened if someone would

have brought Ms. Henze’s complaint to you?

83

Mr. HORTON. Specifically, I had not thought out a plan of action.

But certainly that would be something we would want to follow up

on and try to get to the bottom of.

Ms. DEGETTE. Because it is a serious allegation, right?

Mr. HORTON. Yes, ma’am.

Ms. DEGETTE. Now if you will take a look at Tab 67. This is the

Fleeced Shareholder fax that we were talking about in the last

panel. That did come to your attention, as I recall?

Mr. HORTON. Yes, ma’am.

Ms. DEGETTE. Is that correct? And you were asked to look into

it, right?

Mr. HORTON. That is correct.

Ms. DEGETTE. And you had internal audit Mr. Owens write

memos which provided plausible rebuttals, as you described them

to our staff, to these allegations. Is that right?

Mr. HORTON. Yes, ma’am. I asked Mr. Owens to look into it and

receive the memos that I think the staff is saying, and I believe

you are saying, from Mr. Owens and from Ms. Sanders that tended

to rebut the allegations.

Ms. DEGETTE. Did you ever bring this to the attention of the

board or the audit committee?

Mr. HORTON. No, ma’am.

Ms. DEGETTE. Why not?

Mr. HORTON. The information that Mr. Owens and Ms. Sanders

provided appeared to me to be credible and to be responsive to the

concerns of—you know, I was not aware of any reason to take it

further than it was taken at the time.

Ms. DEGETTE. What about Mr. Scrushy? Was he aware of it? Did

you tell him about it?

Mr. HORTON. I believe—I am going back in my memory. I believe

he was aware of this communication and—that—and Mr. Owens

and Ms. Sanders were to be looking at the data. But I did not make

a specific report to him.

Ms. DEGETTE. How do you know that he knew about it then?

Mr. HORTON. I am going—and I apologize, because my memory

may not be exact on this. But I have—I have some recollection of

his having been involved at least some of the original discussion

when this came to our attention.

Ms. DEGETTE. About the——

Mr. HORTON. When the original memo came up.

Ms. DEGETTE. About the allegations that are made in this email?

Mr. HORTON. Yes, ma’am. Again, that—that is the best of my

recollection now. I could not guarantee that he was involved, but

I think he was.

Ms. DEGETTE. Do you know if Ernst & Young was ever provided

a copy of the memos, the plausible rebuttals?

Mr. HORTON. I am not sure.

Ms. DEGETTE. Now, do you go to the board meetings as legal

counsel?

Mr. HORTON. Only when I have been invited to.

Ms. DEGETTE. How often are you invited?

Mr. HORTON. There is really no particular pattern to it. It would

depend on, you know, what was under discussion and whether Mr.

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Scrushy, who is chairman and CEO of the board up until March,

you know, wanted me there for some reason.

Ms. DEGETTE. And would that be for some specific report or

something of that nature?

Mr. HORTON. Occasionally during—I mean during the period I

would say 1994 through 1998 or 1999 when the company was in

a heavy acquisition mode, I would normally be at the board meetings where acquisitions were being approved. Occasionally there

would be some other topic that Mr. Scrushy would want me to report on, whether it was a piece of litigation or something. It just

really depended on the circumstances.

Ms. DEGETTE. So there was no requirement, as with many corporate boards, that legal counsel be present at—that corporate

legal counsel be present at the board meetings, right?

Mr. HORTON. That is correct.

Ms. DEGETTE. And is that true to this day, do you know?

Mr. HORTON. I am not sure that there is any policy requirement

as a practical matter in the meetings of the board and the special

committee of the board of directors that have occurred since the

end of March, there have invariably, as far as I know——

Ms. DEGETTE. They have had lawyers there all the time lately.

Mr. HORTON. There are a lot of lawyers.

Ms. DEGETTE. Lots of lawyers. Yes. I noticed that.

Thanks.

Mr. WALDEN [presiding]. Thank you. Mr. Horton, I just want to

go back to explain about the Fleeced Shareholder fax so that I understand it. Ernst & Young received this, right?

Mr. HORTON. Yes, sir. That is my understanding.

Mr. WALDEN. And it raises a whole list of issues from somebody

who obviously had inside information about the company, or at

least it would appear they did. And they came to you, Ernst &

Young came to you and said what should we do about this. And is

it accurate to say then you said we will take care of it, we will look

at it?

Mr. HORTON. I am not sure. I do not believe Ernst & Young originally came to me. I think they originally came to Bill Owens and

Mike Martin, who called me in and we—you know, we did undertake to look into it.

Mr. WALDEN. All right. And what was your response back to

Ernst & Young?

Mr. HORTON. That we would look into it.

Mr. WALDEN. So that was it?

Mr. HORTON. Subsequently we got the information that we have

discussed from Mr. Owens and Ms. Sanders, and——

Mr. WALDEN. But are they not the auditors, Ernst & Young,

would you not share that information back to them so they can do

their job?

Mr. HORTON. I believe that it was shared with them ultimately.

I mean, in any event, there was no—as far as I know, no subsequent follow up after that information had been gathered from

Ernst & Young. I never—never heard anything from them or never

had any follow up——

Mr. WALDEN. Can I clarify. Did you or the others involved, do

you know whether or not that they provided the information, the

85

answers to these questions from the Fleece Shareholder to Ernst

& Young?

Mr. HORTON. It is my impression at this point that the information was discussed with Ernst & Young. At this point I just don’t

recall the details of how that——

Mr. WALDEN. You do not remember when or how much, or any

of that?

Mr. HORTON. No, sir. I apologize. I just do not.

Mr. WALDEN. All right.

Mr. Goodreau, in the summer of 2002 did Bill Owens, the CFO

of the company, tell you that there were ‘‘big problems with the

numbers, not Enron big, but significant’’?

Mr. GOODREAU. Sir, it was not in that terminology. What he said

was that—and I believe if you will look at my testimony, it says

that he told me that there was some accounting problems at the

office. And then he said it is not an Enron, but the number is significant.

Mr. WALDEN. Okay. Similar to what I have recounted here, but

there are big problems with the numbers, not Enron big but significant? Is that not what I heard you sort of say?

Mr. GOODREAU. Sir, what I just said is exactly what I remember

him saying.

Mr. WALDEN. All right. When you heard his comments by the

CFO about the numbers of the company, a company you owned

stock in and were an employee of, did you use the compliance hotline to report what Bill Owens had told you?

Mr. GOODREAU. No, sir, because I had no reason or any documentation to prove that what he was saying was criminal.

Mr. WALDEN. So even though he told you there are numbers and

problems and raises the word ‘‘Enron’’, and he is the CFO, that did

not cause concern enough to do anything about it?

Mr. GOODREAU. For all I knew, sir, he was talking about problems in accounting in a certain division. I had no idea that he was

talking about anything other than that.

Mr. WALDEN. But you did have a hotline card like other employees had?

Mr. GOODREAU. Yes, sir. I had a hotline card.

Mr. WALDEN. Okay. But you did not use it? You did not think

that what he said was enough to trigger that?

Mr. GOODREAU. No, sir.

Mr. WALDEN. Okay. Did you witness Mr. Scrushy use a computer

at his Merrian offices located on the premises of his home in Birmingham prior to March 2003?

Mr. GOODREAU. I do not remember him ever using a computer

there.

Mr. WALDEN. Did you not tell our staff, our investigators, that

he had a laptop computer there?

Mr. GOODREAU. He had a laptop computer there, but I do not recall him every using it. I remember it sitting on the counter, but

I never saw him use it.

Mr. WALDEN. Okay. Did you ever investigate or hire an outside

firm to investigate any HealthSouth board members?

Mr. GOODREAU. No, sir. I did not.

86

Mr. WALDEN. Did Mr. Scrushy ever ask you to investigate or hire

a third party to investigate board members?

Mr. GOODREAU. I did not hire any outside person to investigate

a board member.

Ms. DEGETTE. Did you ever investigate a board member?

Mr. GOODREAU. I did.

Mr. WALDEN. Okay. That was part of my question. Who was it?

Can you tell us about it?

Mr. GOODREAU. Mr. May.

Mr. WALDEN. And what was the issue and who asked you to investigate?

Mr. GOODREAU. I do not remember exactly that I was asked to

investigate Mr. May. I looked into Mr. May because I thought that

he had been dishonest.

Mr. WALDEN. In what respect?

Mr. GOODREAU. Mr. May had been involved in the bankruptcy of

a couple of companies, and I did not remember ever hearing that

from Mr. Scrushy.

Mr. WALDEN. Were these——

Mr. GOODREAU. I asked him about it, and he did not know about

it.

Mr. WALDEN. Mr. Scrushy did not know about it?

Mr. GOODREAU. No, sir.

Mr. WALDEN. And were these companies with some relationship

with HealthSouth?

Mr. GOODREAU. I do not think they had any relationship with

HealthSouth.

Mr. WALDEN. Okay. Did you report to Mr. Scrushy about the investigation or what you found out?

Mr. GOODREAU. Yes, sir. I told him that—that—actually what I

did, was I asked him if he knew about that. And he said no, he

did not know about that. And then I think he confronted Mr. May

about it.

Mr. WALDEN. Could you turn to Tab 58? And can you tell us who

is Joel that Mr. Scrushy is referring to? I will let you get to that

tab, sir. Do you know is he referring to Joel Gordon, a long time

board member?

Mr. GOODREAU. Yes, sir. He is.

Mr. WALDEN. And why is he asking you to follow Mr. Gordon?

It says: ‘‘Subject: Re: Come to the first floor. Hang out with Mary

and follow Joel as he goes in and out. See what he is doing. RS.’’

From Richard Scrushy. And you responded. ‘‘Okay. Jim Goodreau.’’

Mr. GOODREAU. Yes, sir.

Mr. WALDEN. Do you know why he was asking you to follow Mr.

Gordon?

Mr. GOODREAU. I do not know why he was asking me to follow

him.

Mr. WALDEN. You never asked him that?

Mr. GOODREAU. No, sir. I never——

Mr. WALDEN. You just did whatever he told you to do and—what

did you find out after following Mr. Gordon?

Mr. GOODREAU. He was just coming out of the—I think they were

in a board meeting or something, and he—Mr. Gordon came out of

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the board meeting. But, I mean, he stayed on the 5th floor. He did

not go anywhere.

Mr. WALDEN. Is that—I mean, I—I have been on a couple of

boards. And I have never run into where the CEO has a security

person follow us in and out of the bathroom, or wherever they go

as board members. Is that pretty typical at HealthSouth?

Mr. GOODREAU. No, sir. That was the only time I believe I was

ever asked.

Mr. WALDEN. And you never inquired as to why?

Mr. GOODREAU. No, sir.

Mr. WALDEN. Did you report? Did Mr. Gordon know he was being

followed? Did he ask you about that?

Mr. GOODREAU. I have no idea if he knew or not. It was not like

I was following him around the—following him around the room.

Mr. WALDEN. All right. Did you ever hire an investigation company by Les Moore and investigate any board members?

Mr. GOODREAU. I hired an investigative company, yes. But as to

whether to investigate any board members, I have—I have no idea.

Mr. WALDEN. Did Mr. Scrushy authorize you to hire outside investigators?

Mr. GOODREAU. I did not ask Mr. Scrushy about hiring outside

investigators.

Mr. WALDEN. Who was paying the bills for the outside investigators?

Mr. GOODREAU. The company.

Mr. WALDEN. Okay. But Mr. Scrushy did not—you are telling me

under oath Mr. Scrushy never asked you to hire these investigators? You did them on your own?

Mr. GOODREAU. Yes, sir.

Mr. WALDEN. But sent the bill back, obviously, or it came out of

your department?

Mr. GOODREAU. Actually, Bill Owens signed off on the bills.

Mr. WALDEN. Bill Owens. And Bill Owens worked for Mr.

Scrushy, right?

Mr. GOODREAU. That is correct.

Mr. WALDEN. Okay. And what were they investigating, this company you hired, Les Moore?

Mr. GOODREAU. The company would investigate whatever it was

that needed to be investigated by the corporation——

Mr. WALDEN. All right. But specifically in this case why did you

hire them?

Mr. GOODREAU. With the board?

Mr. WALDEN. Yes.

Mr. GOODREAU. Is that what you are asking me?

Mr. WALDEN. Yes.

Mr. GOODREAU. Again, I would have to look and see. Because I

am not exactly clear on what specifically you are asking about.

Mr. WALDEN. Okay. Let us get specific. Les Moore. That is a security guard, right, that works for you?

Mr. GOODREAU. He has a company.

Mr. WALDEN. He has a company?

Mr. GOODREAU. Yes.

Mr. WALDEN. And you hired him and that company?

88

Mr. GOODREAU. I had hired that company prior to him becoming

an employee.

Mr. WALDEN. Okay. And why did you hire that company? What

was their mission? What did you ask them to look at?

Mr. GOODREAU. Whenever we had any type of investigative needs

within HealthSouth that required the use of outside

investigators——

Mr. WALDEN. So, would that be to investigate people inside

HealthSouth?

Mr. GOODREAU. Not specifically. No, sir. It might be to

investigate——

Mr. WALDEN. But you are not going to tell me specifically why

you hired these people and what you asked them to look at?

Mr. GOODREAU. Excuse me, sir?

Mr. WALDEN. Are you going to tell me specifically why you hired

this company and what you asked them to look at? I mean, that

is what I am asking is specifically why did you hire them and what

did you ask them to look at? What other kinds of needs were there

at HealthSouth, investigative needs?

Mr. GOODREAU. We had investigative needs for looking into

whatever. We have 50,000 employees, we see 100,000——

Mr. WALDEN. So you were looking at different employees and

what they were doing?

Mr. GOODREAU. No, sir. I was not looking at different employees

and what they were doing.

Mr. WALDEN. Okay.

Mr. GOODREAU. There was an allegation that came up about a

situation where an employee had a problem with someone or had

a confrontation with someone, or someone came into a facility to—

made some threat, or if we received a letter from someone stating

a threat, that we were to investigate that to see what merit it

would hold.

Mr. WALDEN. So how many investigations did you undertake?

Mr. GOODREAU. I cannot recall exactly.

Mr. WALDEN. Can you give me a range? Ten, 100, 5,000?

Mr. GOODREAU. Over a 7 year period, 50 maybe. I do not know.

Mr. WALDEN. And did any of those involve board members?

Mr. GOODREAU. Only the one that I can recall with Mr. May.

Ms. DEGETTE. Will the gentleman yield?

Mr. WALDEN. Certainly.

Ms. DEGETTE. Did you keep records of those investigations, Mr.

Goodreau?

Mr. GOODREAU. Not specifically. If we had records of anything,

it would be retained until the investigation was over and then we

would get rid of it. We had no reason to keep it.

Ms. DEGETTE. So as far as you know, any of the investigations

as you described if someone came into a facility or if there was

some other issue, you would have no record of that if that was

closed at this point?

Mr. GOODREAU. There may be a record of that if it was on our—

we had a reporting system inside the corporate security that kept

with the majority of that. It may or may not be on that system.

Ms. DEGETTE. And what you are saying is not every investigation would have had a record?

89

Mr. GOODREAU. No, ma’am.

Ms. DEGETTE. Thank you.

Thank you, Mr. Chair.

Mr. WALDEN. Did your investigators or yourself, were you armed

running around HealthSouth?

Mr. GOODREAU. There were only probably four guys that were

armed at—or allowed to carry a side arm. They were all trained.

And not everyone would be armed at the same time.

Mr. WALDEN. Okay. And were you one of those four?

Mr. GOODREAU. I was.

Mr. WALDEN. Okay. Did you carry a side arm at all times?

Mr. GOODREAU. I carried a side arm.

Mr. WALDEN. Yes.

I am curious about how extensive this video system was, because

it seemed some of our witnesses were sort of shocked and intimidated to find out it existed. Was it throughout the 5th floor?

Mr. GOODREAU. The camera system?

Mr. WALDEN. Yes.

Mr. GOODREAU. No, sir. The camera system is mainly in the traffic hallways and high traffic areas of the——

Mr. WALDEN. Is it in the conference room sort of places?

Mr. GOODREAU. In—no, sir. It is not in any conference room.

Mr. WALDEN. Okay.

Mr. GOODREAU. There may be some cameras in the back hallway

of the conference center, but there is not any in the conference

room.

Mr. WALDEN. In those—did this system record what transpired?

Would you keep tapes?

Mr. GOODREAU. It did not record audio. It only recorded video.

And we kept the tapes for a specific period of time. I cannot remember if it was 30 days or 60 days exactly. And then the tapes

would just be simply rotated back through.

Mr. WALDEN. And after the company came under various investigations, were those tapes then preserved as part of potential evidence or were they required to be preserved?

Mr. GOODREAU. There was no directive to me to preserve any

tapes. However, there was no change in the normal way we operated. We continued to do what we normally do.

Mr. WALDEN. Okay.

At this point we are going to recess the committee for about 5

minutes. And then we will return. So if you could stay, we would

appreciate it.

And the committee is in recess.

[Brief recess.]

Mr. GREENWOOD. The meeting will come to order. And I thank

the witnesses for their patience.

And the Chair recognizes for 10 minutes the gentleman from

Florida, Mr. Stearns for inquiry.

Mr. STEARNS. Thank you, Mr. Chairman.

And I appreciate your patience here as we recessed and we return here.

Mr. Tanner, I guess you were involved with the founding of this

corporation?

Mr. TANNER. Yes, sir.

90

Mr. STEARNS. And how big was the company when you started

it?

Mr. TANNER. We had one office with just 5 men when we started

the company in 1984.

Mr. STEARNS. Not too long ago. And now how many employees

does HealthSouth have?

Mr. TANNER. I do not know what they have now. I left the company in 1999.

Mr. STEARNS. Okay. Okay. And tell me again why you left the

company.

Mr. TANNER. I retired. My health was getting to the point where

I did not want to take a chance on where I would be in the future.

And I decided to let me retire now and see the world.

Mr. STEARNS. Were you involved with the Compliance Department at HealthSouth?

Mr. TANNER. Yes, sir.

Mr. STEARNS. Okay. And what was your position in that department?

Mr. TANNER. The board made me Corporate Compliance Officer.

Mr. STEARNS. And your responsibilities included what?

Mr. TANNER. I was the Corporate Compliance Officer. The Compliance Department reported up to me to the board committee on

corporate compliance.

Mr. STEARNS. And why did HealthSouth start a Compliance Department? Because they felt it was needed, right?

Mr. TANNER. It was started as a response to a presentation that

Mr. Kusserow and Ernst & Young made following the National

Medical Enterprise——

Mr. STEARNS. So Ms. Cullison claimed that she brought a very

serious charge, potential accounting fraud, to your attention as

head of the Compliance Department in 1999, and that is the year

you retired?

Mr. TANNER. Yes, sir.

Mr. STEARNS. Okay. She brought to your attention a serious

charge. She also claimed that you advised her that you would take

care of the investigation yourself. Do you recall that?

Mr. TANNER. No, sir, I do not. I have no recollection of that.

Mr. STEARNS. So you have no recollection of her bringing a very

serious charge, a potential accounting fraud to your attention, to

the Compliance Department in 1999?

Mr. TANNER. I do not remember a lot of 1999, sir. And that is

one reason why I also retired.

Mr. STEARNS. So you do not recall the information, so obviously

you do not know what she did with it?

Mr. TANNER. That is correct, sir.

Mr. STEARNS. Have you heard anything about what she claimed?

Mr. TANNER. Just in what she said here earlier and what was

said——

Mr. STEARNS. Was that a total surprise to you?

Mr. TANNER. No. It had been reported to me when I was subpoenaed at the SEC hearing.

Mr. STEARNS. Okay. And you heard about this information after

you retired, not before? Is that what your sworn testimony is, that

91

you did not hear about this information while you were an employee of HealthSouth Corporation?

Mr. TANNER. I do not recollect——

Mr. STEARNS. ‘‘Recollect’’ is a sort of vague term. Do you or do

you not remember——

Mr. TANNER. I do not remember, sir, what she said she told me.

Mr. STEARNS. Do you remember her coming in and talking to

you?

Mr. TANNER. I do not remember that, sir. No.

Mr. STEARNS. Do you remember her ever showing up in your office or calling you on the phone? I mean, if I go back and look at

telephone records, will I find that she called you ever?

Mr. TANNER. I am sure since she reported to me, we spoke. I am

sure that we had conversations. I cannot say what the substance

of those conversations were. I do not remember things.

Mr. STEARNS. So you talked to her because she is one of your employees, but you never remember her talking specifically about this

serious charge potential accounting fraud? That is your——

Mr. TANNER. No, sir. I do not remember.

Mr. STEARNS. Okay. Okay. But you talked to her regularly on the

phone and in person about other things?

Mr. TANNER. I am—I am sure we spoke. I am sure we have had

conversations. How many, what they were, I cannot tell you, sir,

because I do not remember.

Mr. STEARNS. Okay. Do you perform when people come to you

with complaints, do you perform actual investigations on these allegations? Have you ever done that in your position as Compliance

Department head? Had you ever taken initiative to investigate any

actual allegations?

Mr. TANNER. The way the Compliance Department was established, she would do the work. She would do the investigations and

using the resources that the Compliance Department had, either a

audit or——

Mr. STEARNS. So she—Cullison did the research for you? And did

she ever tell you that she was investigating any serious charges of

potential problems? Forget accounting fraud. But had she done any

investigation into anything as your employee which would involve

an investigation of allegations?

Mr. TANNER. I received the statistics of activities that the compliance report did that I passed on to the board.

Mr. STEARNS. Okay.

Mr. TANNER. I do not remember——

Mr. STEARNS. You never physically talked to her about any allegations that she was investigating?

Mr. TANNER. I do not remember——

Mr. STEARNS. Just yes or no.

Mr. TANNER. No, sir. I do not.

Mr. STEARNS. Okay. Does the Compliance Department have a

contact in the legal department of HealthSouth?

Mr. TANNER. I think——

Mr. STEARNS. Just yes or no.

Mr. TANNER. I do not remember.

Mr. STEARNS. Well, this is procedural. This is a policy position.

You are in charge of something. This is not something that you reVerDate 11-MAY-2000 10:25 Jan 13, 2004 Jkt 000000 PO 00000 Frm 00099 Fmt 6633 Sfmt 6602 89963.TXT HCOM1 PsN: HCOM1
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member or not. This is actual procedure. Did you have a procedure

in the Compliance Department where you had contact with the

legal department. I think the obvious answer you must have. I

mean, if you are going to have a Compliance Department, you have

got to be able to—just like Congressmen, we have an ethics. So we

know we can go to the Ethnics Committee anytime we have a problem to find out whether we are doing something wrong. So I assume that the Compliance Department would have some contact

with the legal department at HealthSouth. And you are saying you

do not recollect or you do not know. It seemed to me you had to.

That would be part of the police procedure. Am I wrong?

Mr. TANNER. I do not——

Mr. STEARNS. Because you understand, you got to operate in a

legal framework——

Mr. TANNER. Sir——

Mr. STEARNS. You have to have contact with legal.

Mr. TANNER. [continuing] The compliance program was established in response to a presentation. I recall attorneys from legal

department present at that initial meeting.

Mr. STEARNS. So if I go back to the Compliance Department

today and ask them, the new head, do you have any contact with

the legal department, he will say yes? He or she will say yes, do

you not think? Just off——

Mr. TANNER. I do not know.

Mr. STEARNS. Okay.

Mr. TANNER. I am not there, sir.

Mr. STEARNS. Okay. Let me continue to ask——

Mr. TANNER. I retired in 1999.

Mr. STEARNS. How would a Compliance Department employee

know that a complaint was serious enough to be forwarded to the

legal department or even outside authorities? Under your scenario,

you do not even have any contact with the legal department. So answer me this: How you as head of the Compliance Department

would know if your complying with the legal department? Is that

not of the Compliance Department’s responsibility to comply with

legalities? I mean, you are telling me that you have no recollection

if you had any contact with the legal department, yet at the same

time do you not want to comply with the law or even outside authorities? There is something not ticking here.

Mr. TANNER. Sir, if I could remember, I would be happy to tell

you. I do not remember.

Mr. STEARNS. You draw a blank?

Mr. TANNER. Yes, sir. That is one reason why I am no longer

working and I have no activity in terms of everyday work because

my cognitive functions have been impaired.

Mr. STEARNS. Okay. I respect that. I respect that. I understand.

Understand.

But you understand my question?

Mr. TANNER. Yes, sir. I understand your question.

Mr. STEARNS. Okay. And you understand, just take off your hat

and you and I just talking in the lobby out here, we would say, you

are head of the Compliance Department. You should have contact

with the legal department to know what you are doing is correct.

Does that not seem to make sense? We are not talking about back

93

in 1999. We are just talking in general straight common sense that

if you are head of the Compliance Department, you want to be in

touch with the legal department to make sure you obey the law.

Does that not make sense? I am just trying to get you to commit

common sense here what we are talking about. Not asking you to

go back in your memory. Just to say—sir?

Mr. TANNER. Yes.

Mr. STEARNS. Okay. That is all I want. Okay.

You know, I am not making any judgments here. I am just talking. So, I mean, you are certainly entitled. And so I do not mean

to imply you are not entitled here. Because, God bless, you know,

everybody goes through his ups and down here.

So it is our understanding that the Compliance Department policy was to purge all closed complaint materials after 90 days. Is

this a policy that you understood when you were head of it?

Mr. TANNER. When I was interviewed by the counsel, they

showed me the—they made a reference to the purging. And I was

surprised, because I did not——

Mr. STEARNS. You do not remember that policy?

Mr. TANNER. I do not remember that and I was shocked that it

was—said that it was—they were shredded, and I did not have any

knowledge.

Mr. STEARNS. And you do not have any idea when—they actually

then showed you this policy, right, to purge it, in 90 days, they

showed you the policy, right? And you were surprised?

Mr. TANNER. They showed me a spreadsheet, I think it was.

Mr. STEARNS. Right. Yes.

Mr. TANNER. And it said it was a category purged. And it

was——

Mr. STEARNS. Okay. Okay. Do you have any idea who wrote that

policy to purge in 90 days?

Mr. TANNER. No, sir.

Mr. STEARNS. Okay. Okay. Well, thank you for answering my

questions.

And, Mr. Chairman, I yield back my time.

Mr. WALDEN. Thank you.

The Chair recognizes the gentle woman from Colorado.

Ms. DEGETTE. I just have—thank you.

Mr. Tanner, if you can take a look at Tab 98. This is the now

infamous compliance policies that I have been talking about.

Mr. TANNER. Yes, ma’am.

Ms. DEGETTE. It was sent to Ms. Cullison, but there is a cc to

you. Do you remember receiving these compliance policies?

Mr. TANNER. I do not remember. I probably did because my name

is cc’d on it. Yes, ma’am.

Ms. DEGETTE. Do you recall whether these or any compliance

policies were adopted?

Mr. TANNER. I do not recall.

Ms. DEGETTE. Did the company have any compliance policies

when you were the Compliance Officer?

Mr. TANNER. We had the compliance program and the structure

laid out. There was a book, a training program and that type of

thing that laid out what was to be done.

94

Ms. DEGETTE. So there was a procedure in place, you are just not

sure if it is this one?

Mr. TANNER. Yes, I can’t—I do not say it is this format or not.

Ms. DEGETTE. Would it be your recollection as the former Compliance Officer of the company that when there were allegations of

violations of criminal law that legal counsel would be consulted?

Mr. TANNER. I would assume that it would happen, okay. I cannot say it did or did not. But I would assume that would happen.

Ms. DEGETTE. That would be a logical inference to make?

Mr. TANNER. Yes, ma’am.

Ms. DEGETTE. And if that were the policy, you would not be surprised, right?

Mr. TANNER. Yes, ma’am.

Ms. DEGETTE. Do you recall ever contacting legal counsel about

allegations of violations of criminal law yourself when you were

Compliance Officer?

Mr. TANNER. No, ma’am. I do not.

Ms. DEGETTE. Okay. Thank you.

I wanted to ask you, Mr. Goodreau, if you—yesterday the ‘‘The

Wall Street Journal’’ had an article, and it talked about Mr.

Scrushy having wired his truck and taping a woman without her

knowledge considering allegations of various sundry extra marital

affairs that were made while she was in the truck. And I was wondering if you had any knowledge of the truck and its taping system?

Mr. GOODREAU. Other than he used a tape recorder.

Ms. DEGETTE. Did you have a knowledge of that at the time?

Mr. GOODREAU. I know that he used a tape recorder.

Ms. DEGETTE. In his truck?

Mr. GOODREAU. Yes, ma’am.

Ms. DEGETTE. How do you know that?

Mr. GOODREAU. Because he told me.

Ms. DEGETTE. At the time?

Mr. GOODREAU. That—of the taping.

Ms. DEGETTE. Now, of what taping?

Mr. GOODREAU. Of this conversation that you are speaking of.

Ms. DEGETTE. Did he tell you he taped any other conversations

in the truck?

Mr. GOODREAU. No, ma’am.

Ms. DEGETTE. Did he tell you why he taped the conversation?

Mr. GOODREAU. No, ma’am.

Ms. DEGETTE. He just said I taped a conversation in the truck,

and that was it?

Mr. GOODREAU. No, ma’am. He said he taped the conversation

with Amy Krumpton.

Ms. DEGETTE. Did he say why he did that?

Mr. GOODREAU. No, ma’am.

Ms. DEGETTE. He just walked up to you and said I taped this

conversation? That was the end of your conversation with him?

Mr. GOODREAU. No, ma’am. That she had information that was

going to shed some light on his particular situation and the situation that involved Hope Lanius and Bill Massy.

Ms. DEGETTE. I am sorry. The situation that involved what?

Mr. GOODREAU. Hope Lanius and Bill Massy.

95

Ms. DEGETTE. Thank you.

Did Mr. Scrushy often talk to you about taping conversations?

Mr. GOODREAU. No, ma’am.

Ms. DEGETTE. How many times did he?

Mr. GOODREAU. That’s the only—that’s the only conversation I

ever had with him about it.

Ms. DEGETTE. Did you ever wire or arrange to have wired any

of Mr. Scrushy’s homes, offices, vehicles or any other location he

might be?

Mr. GOODREAU. When you mean—when you say ‘‘wire’’?

Ms. DEGETTE. Yes. Taping systems.

Mr. GOODREAU. Maybe a surveillance system at this house or

something of that nature, but not anything in any car or anything

like that.

Ms. DEGETTE. Now, the surveillance system at his home, when

was that installed?

Mr. GOODREAU. There has been a few modifications to that surveillance system throughout the time I have been there.

Ms. DEGETTE. And when have you been there? I am sorry?

Mr. GOODREAU. In the last 7 years, ma’am.

Ms. DEGETTE. And were you in charge of making those modifications?

Mr. GOODREAU. Usually. Yes, ma’am.

Ms. DEGETTE. And what were those modifications?

Mr. GOODREAU. Typically it might be an upgrade to a system or

an upgrade to a camera or something.

Ms. DEGETTE. Does he have cameras throughout his properties?

Mr. GOODREAU. No, ma’am. Just at his home in Birmingham.

Ms. DEGETTE. At his home in Birmingham.

Mr. GOODREAU. Yes, ma’am.

Ms. DEGETTE. So that is where you are saying you made modifications, it was to the system to his home in Birmingham?

Mr. GOODREAU. Yes, ma’am.

Ms. DEGETTE. Did that involve cameras throughout the property?

Mr. GOODREAU. Sometimes it might, and sometimes it would not.

It just——

Ms. DEGETTE. Did it involve audiotaping?

Mr. GOODREAU. No audiotaping.

Ms. DEGETTE. Okay. Now, we heard about Mr. Watkins. Were

there any other times that Mr. Scrushy had you investigate members of the board of HealthSouth?

Mr. GOODREAU. About Mr. Watkins?

Ms. DEGETTE. I’m sorry. It was Mr. May.

Mr. GOODREAU. Yes, ma’am.

Ms. DEGETTE. Were there any others?

Mr. GOODREAU. No, ma’am. Not that I remember.

Ms. DEGETTE. And you testified earlier this year in district court

that Bill Owens told you in the fall of 2002 about fraud that was

going on at HealthSouth. Did you tell Mr. Scrushy about this?

Mr. GOODREAU. No, ma’am.

Ms. DEGETTE. Why not?

Mr. GOODREAU. Well, first of all, Mr. Owens did not tell me

about fraud that was going on at HealthSouth.

96

Ms. DEGETTE. What did he tell you?

Mr. GOODREAU. He told me that there were some accounting

problems at the office. But I did not know if he was talking about

a particular division or not. I was close to him, he was my friend.

And he was confiding in me.

Ms. DEGETTE. And so you did not tell Mr. Scrushy?

Mr. GOODREAU. I did not think there was a need to tell Mr.

Scrushy. I told Mr. Owens he needed to talk to Mr. Scrushy. I was

a security guy. I thought maybe that was something that ought to

be handled on that level of management. Certainly not from my

perspective.

Ms. DEGETTE. Did Mr. Owens tell you the extent of the accounting problems?

Mr. GOODREAU. No, ma’am. What he told me was just what I

said.

Ms. DEGETTE. That there were——

Mr. GOODREAU. There were some accounting problems, that is all

he said.

Ms. DEGETTE. Okay. Did you know that the board wanted to fire

Mr. Owens in late 2002? Did Mr. Owens confide that in you?

Mr. GOODREAU. I do not know that Mr. Owens confided that in

me. I want to say I believe I heard Mr. Scrushy say that, but I am

not positive. I know that it was—I know that I have heard that,

but I just honestly cannot remember.

Ms. DEGETTE. Do you know that Mr. Scrushy actually persuaded

the board not to fire Mr. Owens?

Mr. GOODREAU. I have heard that, too. I do not——

Ms. DEGETTE. Who did——

Mr. GOODREAU. I cannot remember specific conversations. It

seems that I heard—I cannot remember exactly who I heard it

from. But I did hear that he went to bat for Bill to keep his job.

Ms. DEGETTE. But it is your testimony today that you never told

Mr. Scrushy about what Mr. Owens had told you about the accounting problems?

Mr. GOODREAU. Yes, ma’am. That is absolutely correct.

Ms. DEGETTE. Okay.

Mr. WALDEN. Would the gentle woman yield?

Ms. DEGETTE. Sure. Be happy to yield.

Mr. WALDEN. Because I would like to follow up on that point. Because there is something here that just does not add up. Because

Mr. Owens tells you that there is a problem with the accounting.

I think you told me the words were something like we got some

problems in accounting, not as big as Enron, but something to that

effect. We could go back and get your exact words.

But you did not ask any questions of Mr. Owens after that? I am

amazed these people come and just spill their heart to you in little

bits and you do not ask the next question. Did you ask Mr. Owens

any questions about the accounting? Not one word, not one question? If we brought him up here under oath——

Mr. GOODREAU. I asked—I asked him did he—did Mr. Scrushy

know about it. And he said no. And I said you need to tell him,

Bill. This is exactly what I said.

Mr. WALDEN. Okay. And you never said anything to Mr.

Scrushy?

97

Mr. GOODREAU. No, sir. I never did.

Mr. WALDEN. In a given day, how much time did you spend with

Mr. Scrushy?

Mr. GOODREAU. A great portion of the day.

Mr. WALDEN. And this is a man who will tell you he secretly tape

recorded somebody in his pick-up. And you are the security person

that investigates whatever is going on in the company. And you are

the security person who has been tasked to watch board members

coming in and out of a board meeting or a board member coming

and out of a board meeting, you are the security person who hires

third party security firms to look at different things. Security is on

your mind and yet you do not ever say anything to a guy you are

with virtually all the time every day that there is some sort of accounting problems and did Owens ever tell you about it? You never

said anything to Mr. Scrushy about it?

Mr. GOODREAU. I never said anything to him, sir, no.

Mr. WALDEN. Did you say it to anybody in the company?

Mr. GOODREAU. I said it to Les Moore that works with me.

Mr. WALDEN. I’m sorry, to whom?

Mr. GOODREAU. I said to the gentleman that works with me.

Mr. WALDEN. Another security person?

Mr. GOODREAU. Yes, sir. And—and——

Mr. WALDEN. What did you tell him?

Mr. GOODREAU. Sir?

Mr. WALDEN. What did you tell him?

Mr. GOODREAU. The same thing I just told you. That—that I met

with Bill Owens last night and Bill said there was some accounting

problems at the office. And I told him to—I asked him did he talk

to Richard, and he—or did Richard know, and he said no. And I

said well you need to tell him.

Mr. WALDEN. What prompted your meeting with Mr. Owens?

Mr. GOODREAU. He called me to talk to me.

Mr. WALDEN. About what subjects?

Mr. GOODREAU. I do not know. Bill and I were friends. But he

called and wanted me to—to——

Mr. WALDEN. Would you say this is the principal subject?

Mr. GOODREAU. Excuse me, sir?

Mr. WALDEN. Would you say that this revolution of accounting

problems at HealthSouth was the principal topic of your conversation? Was it a day or night or——

Mr. GOODREAU. It was in the evening. Probably, I do not know,

7, 8. But I do not know that that——

Mr. WALDEN. Were you usually there that late at night?

Mr. GOODREAU. Where?

Mr. WALDEN. Wherever you had—where did this meeting take

place?

Mr. GOODREAU. It was a Mexican restaurant, On The Border, in

Birmingham.

Mr. WALDEN. Okay. So he called you to come to a Mexican restaurant?

Mr. GOODREAU. I do not remember exactly what he said, but it

was something to the effect of meet at On The Border. You know,

go and meet at On The Border.

98

Mr. WALDEN. Okay. And so he calls, says meet me On The Border. You do not remember anything else you talked about, but you

did talk about——

Mr. GOODREAU. I am sure we probably talked about his—his

family situation and things like that that he and I would typically

talk about.

Mr. WALDEN. Okay. But in the course of that conversation he

said there were some accounting problems?

Mr. GOODREAU. Well, I could tell he had something on his mind,

but I did not know what it was.

Mr. WALDEN. Okay. Did you think there were any problems with

the approval process for board minutes?

Mr. Horton, let us go to you. I am sorry.

Ms. DEGETTE. Excuse me.

Mr. WALDEN. Oh, I am sorry.

Ms. DEGETTE. I yield back all the time I have left.

Mr. GREENWOOD. The gentlelady’s time has expired.

Mr. WALDEN. I would yield her some if——

Ms. DEGETTE. That is okay.

Mr. GREENWOOD. That is quite all right. Neither of you have

anything to yield at this point.

The Chair recognizes himself for 10 minutes.

Mr. WALDEN. Oh, okay.

Mr. GREENWOOD. And, Mr. Hale, I want to go back to a line of

questioning that I had with you earlier. And I want to put this

thing in its entire consequence. Okay.

The reason that this congressional committee is holding this

hearing is because in my district and every State in the union retirees, among others, invested in HealthSouth because they were

led to believe that HealthSouth was a vibrant growing company, it

was meeting its Wall Street expectations. People all over the country put their hard earned earnings into this company to help pay

for—to put money away and let it grow for their children’s education. Investors believed in this company.

What we know is that at some point, for a number of reasons,

the stock dropped and it dropped precipitously. We also know that

Mr. Scrushy sold 75 percent of his stock by, I think, July 31, 2002.

Okay.

What we are interested in, what the SEC is interested in, what

the Justice Department is interested in is whether or not Mr.

Scrushy, among other things, sold his stock when he did because

he understood that there was going to be a major financial impact

to this company because in essence it had gotten the word from the

Medicare program, from CMS, that it was wildly overbilling Medicare and charging individual rates for group rates for group therapy.

So it is important for us to understand when it was that Mr.

Scrushy, what did Mr. Scrushy know about that impact and when

he knew it.

The logical thing for us to do is to go to the board meetings to

find out when at those board meetings there was a discussion

about this so you can put that into a chronology. Okay.

Now, having put that in context, and I would like you to go again

back to Tab 9 and Tab 10 from your notebook. Now in Tab 9, which

99

are the minutes from the August 26, 2002 board meeting—you with

me?

Mr. HALE. Yes, sir.

Mr. GREENWOOD. Okay. And you included in those—you are the

secretary, you are in charge of the minutes. And you wrote in those

minutes the sentence that says ‘‘He informed Mr. Scrushy on August 6 that it might apply’’—this is in reference to this new directive out of CMS about billing—‘‘that it might apply to such services

in freestanding outpatient centers and the impact could be $15 million to $20 million. Mr. Scrushy stated that he had advised Mr.

McVay and subsequently Mr. Owens to go back to CMS for better

clarification.’’ All right?

Now, are those the words that in fact were not in your draft minutes that you added at Mr. Scrushy’s direction?

Mr. HALE. I believe so. Yes, sir.

Mr. GREENWOOD. Pardon me?

Mr. HALE. I believe so. Yes, sir.

Mr. GREENWOOD. Okay. So you took notes at the meeting.

They’re in Tab 10. None of those words are in your notes. But you

added them into the minutes after Mr. Scrushy told you to? Right?

Mr. HALE. Let me check with my notes and make sure that—

what that—if I could, sir, refer back to the notes on the August 8

meeting.

Mr. GREENWOOD. Sure. Yes.

Mr. HALE. Do you know which tab? Could you lead me to those,

please?

Mr. GREENWOOD. Oh, you want to know where they are? If you

look in Tab 10 and you look at the page—let’s see here. That’s a

board of director’s minutes in your handwriting, 8/26/02. And I

think the relevant language is on the page that is labeled 293-0467

having to do with timeline of CMS transmittal.

Mr. HALE. Yes. I am trying to find the notes on the August 8

meeting.

Mr. GREENWOOD. Oh. That is on Tab 9. It is on the third page

of that document at the very top. It says ‘‘He informed Mr.

Scrushy,’’ and this is—are you with me now?

Mr. HALE. I am with you on the August 26 minutes. Yes, sir. I

am looking for the notes——

Mr. GREENWOOD. All right. Let’s start at page——

Mr. HALE. [continuing] of the August 8 meeting.

Mr. GREENWOOD. Okay. Go to Tab 8. Are you looking for the

words that I quoted in the official?

Mr. HALE. Yes. I wanted to reference my notes on the August 8

meeting.

Mr. GREENWOOD. Okay. That is Tab 8. Okay. And it says ‘‘discussion of CMS transmittal’’—this is on the fourth page of that document at the very bottom.

Mr. HALE. Okay. The—I believe what referenced back to the August 26, what was added by Mr. Scrushy was the sentence ‘‘He informed Mr. Scrushy,’’ and this was Mr. Owens going, again,

through the timeline. And the timeline it stated ‘‘He informed Mr.

Scrushy on August 6 that it might apply to such services and freestanding outpatient centers, and the impact could be $15 to $20

100

million.’’ The—if you reference back the August 8 board minutes,

my notes, which is 388-0445.

Mr. GREENWOOD. Yes.

Mr. HALE. Actually I make a notation here that with the discussion of the timeline of the transmittal letter, that the—they advised and the board concurred that management should meet again

with CMS to assess—to get additional clarification. So that was in

that part of it as far as the reference to go back, that is where that

came from.

Mr. GREENWOOD. Okay. Now, you did add that sentence, ‘‘He in- formed Mr. Scrushy’’ all the way up to $15 to $20 million, you

added that line at Mr. Scrushy’s request, correct?

Mr. HALE. Yes, sir.

Mr. GREENWOOD. Okay.

Mr. HALE. He wanted additional clarification on the timeline.

Mr. GREENWOOD. Got it.

Mr. HALE. That was included in the timeline.

Mr. GREENWOOD. Okay. Now, you testified earlier that there

were at least two kinds of occurrences that would cause you to

amend minutes. One is someone, for instance Mr. Scrushy, would

say Mr. Hale you forgot that we said this. You forgot to incorporate

this in your minutes. And if you had what you called an independent recollection of that being said, you said, oh yes—you would

say, oh, yes, I did—yes, I remember that but I did not put it in the

minutes so I will put it in now. Okay. That is one way you would

amend the minutes?

Mr. HALE. Yes, sir.

Mr. GREENWOOD. Okay. The other way you said you would

amend the minutes is if Mr. Scrushy told you that certain things

happened in executive sessions which you did not attend, correct?

Mr. HALE. Well, that would be an addition, not necessarily an

amendment to something that was in there.

Mr. GREENWOOD. Okay. So the question I have is which of those

occurrences caused that sentence to be added to the minutes? Is

that because Mr. Scrushy reminded you of that and you independently recollected all of that language, including that there was a

$15 to $20 million impact?

Mr. HALE. Yes, sir. I remember that being presented. Yes.

Mr. GREENWOOD. You remember it being discussed at that board

meeting?

Mr. HALE. The board meeting on August 6, not August 26. But

this is referencing back to the timeline of events.

Mr. GREENWOOD. Is it August 8 you mean?

Mr. HALE. August 8, yes.

Mr. GREENWOOD. Okay. Then why was it not put in the minutes

from the August 8 meeting? Why was it put in the minutes from

the August 26 meeting?

Mr. HALE. The—what is in the August 26 meeting is, it states

Mr. Scrushy asks Mr. Owens to review with the board the timeline

of events. So, Mr. Owens was going back through with the board

the timeline on when these—with 1753. So this was referencing

back the timeline of events.

Mr. GREENWOOD. All right. Well then go to Tab 7. And those are

the official minutes of the August 8 meeting.

101

Mr. HALE. Okay.

Mr. GREENWOOD. All right. Where in those minutes was a reflection of this conversation?

Mr. HALE. It is not in there, sir.

Mr. GREENWOOD. Why not?

Mr. HALE. Well, everything is—I mean, I do not put every detail

in the minutes.

Mr. GREENWOOD. But on—you thought it was important to

amend the August 2 notes to say that on August 8 something occurred, but you did not think it was important to amend the August 8 notes minutes to actually reflect that? Is that right?

Mr. HALE. I was not requested to consider an amendment to the

August 8 notes.

Mr. GREENWOOD. No red lights went off in your mind that it

would seem funny that Mr. Scrushy thought it was critical to have

the August 26 minutes reflect this conversation?

Mr. HALE. He was requesting more detail than had been put in

the minutes. In looking—you know, in looking back at that date

when Mr. Owens said he communicated with Mr. Scrushy and the

amount that they were talking about was critical in that time period. So I felt it was important.

Mr. GREENWOOD. So give us your independent recall now? What

do you remember, how do you remember that conversation occurring? At the board meeting on August 8 what do you remember—

August 26, was there in fact that discussion and can you recall it

for us?

Mr. HALE. I recall Mr. Owens going through a very detailed

timeline of those events and the sequence of those events. And including, you know, when he told Mr. Scrushy, what they initially

thought the range of impact would be. You know, the meetings

with CMS and, you know, when that changed after that meeting

when they were—it was indicated that it would apply to more of

the outpatient centers than they initially thought. That was—it

what was presented. That is what I recall. Yes, sir.

Mr. GREENWOOD. My time has expired.

We are going to wait a moment for Mr. Walden to return.

Before I give time to Mr. Walden, Mr. Horton, you were at that

August 16 board meeting, is that correct?

Mr. HORTON. Yes, sir, it is.

Mr. GREENWOOD. Do you recall the conversation, do you recall

the discussion in the same way that Mr. Hale recalls the discussion?

Mr. HORTON. My recollection, I got a little confused there. But

my recollection is consistent with what’s in the minutes. Yes, sir.

Mr. GREENWOOD. The gentleman from Oregon for 10 minutes.

Mr. WALDEN. Mr. Horton, I want to go back to how the board

minutes were handled. Are you—do you think there were any problems with the approval process for the board minutes?

Mr. HORTON. The question that has come up in this process, I

know in several meetings with the staff, was the approval of the

minutes. And typically as I think—as I think one of—I apologize,

I can’t remember which of you alluded to before, it was not the

common practice to actually formally approve the minutes at each

102

subsequent meeting from previous meetings. And, yes sir. I think

that is a weakness in the system, and that——

Mr. WALDEN. Let me make sure I understand your role in this,

too. You are the corporate counsel?

Mr. HORTON. I was. Yes, sir.

Mr. WALDEN. You were. And you were during for how long?

What period of time gain?

Mr. HORTON. From July 1994 until September 2003.

Mr. WALDEN. And did you ever advise them to handle the minutes in a different manner?

Mr. HORTON. No, sir. I do not believe I did.

Mr. WALDEN. Yes. Were you aware of any of these investigation

of a board member?

Mr. HORTON. I do not know that I was particularly aware of an

investigation. I had heard at some point that Mr. Scrushy—I had

understood that Mr. Scrushy had asked someone to look into Mr.

May’s background and whether—sort of the employment history

that was on his re ́sume ́, if you will was—was accurate and complete. And I later heard that it was. But I was not particularly

aware of details of that.

Mr. WALDEN. Yes. Now, I thought we heard from Mr. Goodreau

that there was something in Mr. May’s background that was not

know beforehand. Some bankruptcies or something?

Mr. GOODREAU. I believe Mr. May was involved in some companies with some bankruptcy troubles, and I did not know that about

it and I did not think Mr. Scrushy did. That was what I was saying, that I made him aware of that.

Mr. WALDEN. You made Mr. Scrushy aware of that?

Mr. GOODREAU. Yes.

Mr. WALDEN. I still do not understand why you would not have

made Mr. Scrushy aware of the comment about an accounting

problem, Enron—not Enron like but all of that.

Mr. Horton, were you ever made aware of any accounting problems?

Mr. HORTON. No, sir. I was not.

Mr. WALDEN. So nobody stepped up and told you. And the board

was never made aware. Is that accurate?

Mr. HORTON. As far as I know that is correct, sir.

Mr. WALDEN. Okay. Mr. Horton, if you could turn to Tab 87.

That is where you will find an email that you wrote to Mr. Hale

and Weston Smith on September 29, 2002, and you write, ‘‘I am

finding no record that I was ever given drafts of audit committee

minutes for 2001 after March 27 or 2002. Do either of you know

the status of audit committee minutes?’’ And the email is Tab 87.

It shows it is from you.

Mr. HORTON. That’s——

Mr. WALDEN. I’m sorry. It is apparently Tab 86.

Mr. HORTON. Okay.

Mr. WALDEN. Okay.

Mr. HORTON. I have it now. Yes, sir. I’m sorry. What was the

question?

Mr. WALDEN. The question is—well then if you will turn to Tab—

is that probably 87 then? 87 there are two emails between you and

Weston Smith dated October 7, 2002. After you again request the

103

audit minutes. Mr. Smith writes ‘‘Bill, copies of the minutes were

sent to George Strong last week. He had requested them in response to Fulbright. We have 2002 minutes. None were prepared

in 2001.’’ So my first question is why did not you as corporate counsel have copies of the audit committee minutes?

Mr. HORTON. Well——

Mr. WALDEN. Would you normally have had copies in prior

years?

Mr. HORTON. In the normal course the minute books were maintained, physically maintained in my department. So ordinarily they

would have come to us. Yes, sir.

Mr. WALDEN. Okay. Why did it take nearly a year and a half to

ask for the audit committee meeting minutes?

Mr. HORTON. I do not think I had become aware that we did not

have the minutes until that point.

Mr. WALDEN. So who was responsible for maintaining the minutes for committee meetings? Somebody in your department?

Mr. HORTON. No, sir. Normally the—the corporate secretary normally maintains the minutes. If it is a circumstance where there

were, you know, multiple committee meetings going on at more or

less the same time, then the corporate secretary, Mr. Tanner or

Mr. Hale as the case may be, might ask me or one of the other assistant secretaries to take minutes for one committee meeting

while he covered another one.

Mr. WALDEN. Sure. Yes.

Mr. HORTON. And as far as a I know, in these particular audit

committee meetings for whatever reason, nobody was ever requested to take minutes.

Mr. WALDEN. You know, I hope you understand. Again, having

spent 5 years on a relatively small bank board, we had somebody

taking minutes at every committee meeting. And they came up to

the board—we met every month, the board did. And the committees did not always meet every month. But the minutes came forward. We had presentations to the board. We reviewed the minutes. We reviewed the minutes of the board meeting. We acted on

them. There was an agenda. If we went into executive session, it

was spelled out.

How in the devil does a Fortune 500 company not have a board

that meets, you know, once or twice a year and you do not keep

minutes? Can you explain that to me?

Mr. HORTON. To have a committee that meets once or twice a

year or——

Mr. WALDEN. How often did the board meet?

Mr. HORTON. It would vary from year to year. In a typical year,

I would say 10 or 12 times.

Mr. WALDEN. Ten or 12 times a year the board met? I was under

the impression they only met like once or twice a year. How often

did the committee met? The audit committee? Quarterly? Monthly?

Mr. HORTON. The audit committee in recent years, as I understood it, met quarterly. But I am not—going back further, I do not

think they did.

Mr. WALDEN. Did the proxy statements reflect that?

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Mr. HORTON. Yes, sir. The proxy statements reflected the total

number of meetings for each committee. Yes. For the preceding

year, and the total number of board meetings.

Mr. WALDEN. I am told the proxy statements for 2001 indicate

that the audit committee met one time.

Mr. HORTON. That’s—that is what the proxy statement reflects.

I understand that the audit committee members have records of

other meetings which were not in the corporate minutes at the

time the proxy statement was prepared.

Mr. WALDEN. Whose job was it to keep track of the minutes of

the committee meetings? If the committees were meeting and no

minutes were taken or if members had minutes of committee meetings and they were not provided, I mean who is running the ship

here?

Mr. HORTON. I cannot answer that question, sir.

Mr. WALDEN. Were you ever asked to—if the minutes were kept

in your books in your office, was it your responsibility to ask where

they are? I mean, you did ask in this one email, and I commend

you for that. But——

Mr. HORTON. Sir, in circumstance as in this case where it came

to my attention that we were missing minutes, I would try to find

out about them. If—if it did not come to my attention, you know,

I would not necessarily ask.

Mr. WALDEN. So you had members of the board who met as committees to review various things and you are telling me that the

board met basically every month, 10 to 12 times a year, right?

Mr. HORTON. In a typical year. Yes.

Mr. WALDEN. Typical year. And are there agendas indicating

that the chairs of the various committees of the board discussed

what they had met and talked about as committees? Was that on

an agenda?

Mr. HORTON. In the ordinary course I did not see board agendas,

sir. So I really am not in a position to answer that question.

Mr. WALDEN. Did you sit in on the board meetings?

Mr. HORTON. Again, as I said earlier, I sat in if I was invited to

sit in. I did not sit in as a routine matter.

Mr. WALDEN. How many board meetings a year would you have

sat in on?

Mr. HORTON. Again, as I testified earlier, it would have depended

on the subject matter and whether Mr. Scrushy, who was the

chairman and CEO for all the time that I had been there until the

end of March, invited me.

Mr. WALDEN. Oh, if he invited you? Oh, I see. All right.

Did Mr. Scrushy tell you that the 175—okay. Let me go to a document. Mr. Scrushy sent an email to Larry Doc Leemack at

sourcemed.net on August 27. And we will provide you with that.

In this email he says ‘‘Thanks. The genius in all this will be seen

later. We will take some heat only in the shortrun. Swad told me

he had talked to you and I appreciate you’’ that’s the type ‘‘support

and understanding. I will call you soon to go over everything. RS.’’ Did Mr. Scrushy tell you the $175 million announcement was a

genius plan?

Mr. HORTON. No, sir.

Mr. WALDEN. Do you know what he’s referring to?

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Mr. HORTON. No, sir, I do not.

Mr. WALDEN. Do you know anything about whatever this plan is

he references? Did he ever talk to you about his strategy on the announcement of the $175 million?

Mr. HORTON. I discussed with him the substance of the press release in which that was announced. But I—I do not know of any

particular strategy. No, sir.

Mr. WALDEN. Do any of the rest of you? Are any of the rest of

you aware of what this might mean, the genius of all this will be

seen later?

I will ask you individually. Mr. Hale?

Mr. HALE. No.

Mr. WALDEN. Mr. Goodreau?

Mr. GOODREAU. No, sir.

Mr. WALDEN. Mr. Tanner?

Mr. TANNER. No, sir.

Mr. WALDEN. You all say no?

Who is Larry Doc Leemack?

Mr. HORTON. Dr. Leemack is a physician in Birmingham.

Mr. WALDEN. Was a he stockholder in the company?

Mr. HORTON. I believe he is a stockholder. Yes, sir.

Mr. WALDEN. Okay. All right.

I do not have any other questions. Thank you, Mr. Chairman.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes himself for 10 minute.

Mr. Horton, let me ask you a series of questions. When were you

first made aware of Transmittal 753?

Mr. HORTON. 1753? I was made aware of it on June 6 of last

year.

Mr. GREENWOOD. Okay. Was this the first time that you were

made aware of issues with regard how HealthSouth was billing

Medicare for group therapy?

Mr. HORTON. We had issues that had arisen in a case filed under

the False Claims Act in which the Department of Justice intervened. It was actually four cases in which the Department of Justice intervened in December 2001, January 2002.

Mr. GREENWOOD. Okay. So you knew way back then that this

was at least a potentially serious liability for the company? That

other companies in a similar business, the same business as

HealthSouth, was being subjected to lawsuits over its billing practices? Is that correct?

Mr. HORTON. That other companies were being subjected to

law—I was aware of lawsuit directed against HealthSouth.

Mr. GREENWOOD. Against HealthSouth. Okay. So you knew there

was a suit out there?

Mr. HORTON. Yes, sir.

Mr. GREENWOOD. And when did you first know that?

Mr. HORTON. The original lawsuit, I guess before the government

intervened, we were made aware by the Department of Justice in

sometime in 2000, I believe.

Mr. GREENWOOD. Okay. And did you share that information with

Mr. Scrushy?

Mr. HORTON. Yes, sir.

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Mr. GREENWOOD. Okay. When you became aware of Transmittal

1753 what other officers of the company did you discuss this with?

Mr. HORTON. Discussed Transmittal 1753 with Bill Owens who

was then the President and CEO, with Weston Smith who was

then the CFO, with Susan Smith who was the Senior Vice President of Reimbursement, with Larry Taylor who was at the time the

President of our Ambulatory Services Division and at various times

with other lower level officers.

Mr. GREENWOOD. And never with Mr. Scrushy?

Mr. HORTON. I do not recall having any discussions with Mr.

Scrushy about it until sometime in August 2002.

Mr. GREENWOOD. How did you advise the company to address the

Medicare billing for group therapy while the company was sorting

through the issues?

Mr. HORTON. My advice was to take a conservative position and

assume, while there were questions about what Transmittal 1753

meant, that we needed to assume that it applied to our outpatient

operations and take what I would characterize as a conservative

position on the issue.

Mr. GREENWOOD. And did the company act on your advice?

Mr. HORTON. The company, ultimately the decision was to seek

clarification from the Centers for Medicare and Medicaid Services,

CMS. And it was my understanding that the operations personnel

were directed not to bill Medicare for outpatient therapy services

during a period beginning July 1, 2002 until that clarification had

been obtained.

Mr. GREENWOOD. Okay. I want you to turn to Tab 29, if you

would. You will find an email, dated July 7, 2002 with an attachment which you forwarded to Bill Owens, Weston Smith and Susan

Jones-Smith. And attached to that is a memo from Tom Fox of

Reed Smith on the status of group therapy issues.

On page 7 of the memo——

Mr. HORTON. Mr. Chairman, that is not Tab 29 in my book.

Mr. GREENWOOD. All right. I will clarify that for you then. 79.

I am sorry. Somebody’s sevens look like a two. Okay.

On page 7 of the memo in the first full paragraph, ‘‘HealthSouth

outside counsel advises ‘‘However if HealthSouth were to continue

to utilize the clinical standards followed in the past which essentially limited billing under the group therapy code only when two

or more patients were treated at the same time with the same modality as opposed to billing for concurrent therapy, if the patients

were treated with different modalities, the risk of liability for

claims submitted by HealthSouth for services provided after July

1, 2002 is greatly increased and could implicate its rehab hospitals.’’ You see that?

Mr. HORTON. Yes, sir.

Mr. GREENWOOD. All right. In your email you state that you

agree with this advice and that you want to get clarification to the

field right away. What was Mr. Owens’ response when you discussed this with him?

Mr. HORTON. I did not—I do not recall discussing this particular

email and memorandum with him. I have discussed the issue with

him on a number of occasions and his response was to schedule a

meeting with appropriate officials at CMS to attempt to get clarity

107

on the issue. And a meeting was ultimately scheduled with Tom

Grissom, who was then the relative person at CMS.

Mr. GREENWOOD. Okay. Then I am going to ask you to turn now

to Tab 80 in the binder. And there you will find another email from

Tom Fox of Reed Smith, dated July 24, 2002.

Mr. HORTON. Yes, sir.

Mr. GREENWOOD. It reads: ‘‘This is what I would say to Bill

Owens and Richard if I had the opportunity, unless and until

Transmittal 1753 is withdraw, outside counsel is telling the company that it faces substantial risk of false claims liability by not

following that coding and billing policy for therapy effective July 1,

2002.’’ And my question to you is what did you do with this advice

from HealthSouth’s outside counsel? Who did you tell about it?

Mr. HORTON. Throughout this process I was conveying this advice to Mr. Owens, to Weston Smith, to Susan Smith through the

operations and reimbursement chains.

Mr. GREENWOOD. As the general counsel of this company, would

not you have wanted to make sure that the CEO himself understood that there was significant and serious jeopardy, financial

jeopardy, perhaps worse if they did not change their billing practices?

Mr. HORTON. Sir, as I have discussed with the staff when we

originally addressed this, my belief was that unless I could get Mr.

Owens and the senior operations personnel to form a unified position on this issue, that if I took it to Mr. Scrushy without that, that

Mr. Scrushy would disregard it.

Mr. GREENWOOD. Now, you knew he was engaged in a stock sale,

Mr. Scrushy, right? You were aware that he was—of his preparations and his ultimate sales of ultimately $99 million worth of

stock?

Mr. HORTON. Beginning in early to mid-July. Yes, sir.

Mr. GREENWOOD. All right. Okay. Now, you are a smart lawyer.

Did it occur to you that Mr. Scrushy’s knowledge or lack of knowledge, relative knowledge of this change in billing practices might

have some legal implications with regard to the timing of the sale

of the stock?

Mr. HORTON. No, sir. At this point I had no basis to evaluate the

materiality of this information. So I did not really take that into

account.

Mr. GREENWOOD. Materiality as it regards what?

Mr. HORTON. Materiality as regards financial impact of——

Mr. GREENWOOD. Well, you know it was—you had been advised

by outside counsel that it was a serious issue that would have significant impact on the company, were you not?

Mr. HORTON. I do not think outside counsel had provided us with

any information. And, indeed, I do not think they could have provided us with any information.

Mr. GREENWOOD. Okay. So in other words, they did not tell you

this magnitude of the impact on the company of changing? They

just suggested that change needed to be made?

Mr. HORTON. That is correct.

Mr. GREENWOOD. Okay. Was Mr. Scrushy aware in 2001 that the

Department of Justice was planning to intervene in a false claim

108

suit that alleged HealthSouth was improperly billing individual

therapy when they should have been billing for group?

Mr. HORTON. He was aware that we were in communication with

DOJ throughout 2001 about their possible intervention in the False

Claims Act litigation. And then when we received confirmation that

DOJ was going to intervene in late December 2001, he was aware

of that. Yes, sir.

Mr. GREENWOOD. Did Mr. Scrushy have an understanding about

what the government’s allegations were with respect to group therapy charges?

Mr. HORTON. I discussed it with him, sir. I assumed he had an

understanding from that.

Mr. GREENWOOD. Did you engage in discussions with Mr.

Scrushy about the potential damages facing the company in a False

Claims suit?

Mr. HORTON. Not at that time. No, sir. We did not have any

basis on which to quantify damages.

Mr. GREENWOOD. Were you present in any meeting prior to

Transmittal 1753 where Mr. Scrushy discussed what HealthSouth’s

strategy should be with respect to the group therapy claims alleged

in the False Claims lawsuit?

Mr. HORTON. There was a meeting that occurred, I believe, in

March 2002 at which Mr. Scrushy was present where we discussed

strategies to get legislative clarification of the group therapy issue

from this House. Yes, sir.

Mr. GREENWOOD. Is it fair to say that Mr. Scrushy was well

aware prior to Transmittal 1753 of HealthSouth’s billing practices

concerning group versus individual therapy claims and the potential claims against the company asserted by various False Claims

suits?

Mr. HORTON. He was certainly aware of the False Claims Act litigation and the nature of the claims therein. Yes, sir.

Mr. GREENWOOD. As general counsel did you feel that you had

the access to Mr. Scrushy that you needed, the ability to advise

him of what you know, to make recommendations to him? Because

it sounds like you needed to go—that between you as general counsel and Mr. Scrushy as CEO, there were other officers that you had

to either convince them—you had to convince them before you

dared to take this information to Mr. Scrushy?

Mr. HORTON. In general, I do not think I would characterize it

as a problem of access, sir. But I would characterize it as a question of what was going to be needed to get his attention, particularly in the last couple of years. Mr. Scrushy was never—was never

an easy man to discuss things with that were bad news or that

would make him unhappy. And in particular it was my belief that

if—if I raised an issue that involved operational matters and did

not have a consensus among the operations people, that in all likelihood my advise would be—would be discounted or perhaps disregarded.

Mr. GREENWOOD. Would you be uncomfortable having to operate

under that circumstances?

Mr. HORTON. Yes, sir. I did.

109

Mr. GREENWOOD. Okay. Is it your recollection that Bill Owens

shared with Mr. Scrushy in February 2002 an estimate of the potential impact of changing HealthSouth’s billing practices?

Mr. HORTON. In February 2002?

Mr. GREENWOOD. Yes.

Mr. HORTON. I do not believe I am aware of that, sir.

Mr. GREENWOOD. Okay. I have no further questions.

I would——

Ms. DEGETTE. I have a couple.

Mr. GREENWOOD. We will get to you in a second, Ms. DeGette.

I would move that we enter the documents into the record. And

without objection, that will be the case.

Ms. DeGette, do you have additional inquiry?

Ms. DEGETTE. Yes, I do. Thank you.

Mr. Horton, as I sit here and review all of your correspondence

in July 2002 regarding Transmittal 1753 and going back and forth,

and as I listen to your answers to the Chairman’s questions it occurs me that there was quite a bit of concern on the part of the

legal department as to what people should be doing about the

group billing code for the physical therapy sessions. Would that be

a fair statement on my part?

Mr. HORTON. There was certainly a lot of concern. In general, I

was the only person in the legal department who was actively involved in this issue.

Ms. DEGETTE. Okay. So you were concerned?

Mr. HORTON. Yes, ma’am.

Ms. DEGETTE. And that is because HealthSouth was doing a lot

of physical therapy sessions and how that was billed would be important to the company, right?

Mr. HORTON. Yes, ma’am.

Ms. DEGETTE. And as general counsel you wanted to make sure

that the company was billing correctly because of liability issues,

right? I think you said that?

Mr. HORTON. That is correct.

Ms. DEGETTE. Did you ever ask anybody from the financial management of the company about what the financial impact would be

of a changing code?

Mr. HORTON. I do not think I specifically asked that. I certainly

tried to get the financial—the CFO and the head of reimbursement

to focus on this issue.

Ms. DEGETTE. Did they ever tell you what the impact would be?

Mr. HORTON. I did not receive any information on the financial

impact until—until after August 15, I guess, of last year which——

Ms. DEGETTE. Of 2002?

Mr. HORTON. Of 2002, which was the $175 million estimate.

Ms. DEGETTE. And even before the $175 million, in fairness, you

knew that it would be a large number, right?

Mr. HORTON. I really did not—did not have information to make

an estimate of the number. I mean, large——

Ms. DEGETTE. Well, I mean in that case, if you look at Tab 79

where you are sending—it looks like an email to Bill Owens from

you with the memo from Tom Fox on the status of group therapy

issues, and you say ‘‘importance high’’, right?

Mr. HORTON. Yes, ma’am.

110

Ms. DEGETTE. And then there is the memo. And you say ‘‘In particular I point out that Reed Smith’s strong advice is the recent

group therapy transmittal should be read to apply to all non-PPE

PT or OT services. I agree with this position.’’ And you go on. So

you thought this was important enough to send it to Bill Owens

with high importance, right?

Mr. HORTON. Yes, ma’am.

Ms. DEGETTE. And then there are some follow up emails. An

email from Tom Fox to you on July 24.

During that period of July 2002 you were really—you thought

this was important to get resolved, right?

Mr. HORTON. Yes, I did.

Ms. DEGETTE. And did you get it resolved?

Mr. HORTON. I thought I had ultimately in August.

Ms. DEGETTE. All right. Now, I have a memo I would like to

show you, and it is not in your notebook. If we can have this given

to—you have it?

Mr. HORTON. I believe so. Yes, ma’am.

Ms. DEGETTE. Okay. Because I believe you said earlier in response to a question by the Chairman that you were not particularly—or you had not heard any allegations of accounting problems.

Is that correct?

Mr. HORTON. That is correct.

Ms. DEGETTE. Now, I have shown you a memo. It is dated September 29, 1999. And it is from you to Michael D. Martin and William T. Owens, the CFO and controller at that time, right?

Mr. HORTON. Yes, ma’am.

Ms. DEGETTE. Do you recognize this memo?

Mr. HORTON. I do.

Ms. DEGETTE. Okay. I find this curious, because you said you did

not know of any accounting problems. But in 1999 you are sending

this memo to Martin and Owens and it says ‘‘I thought you might

find interesting the enclosed press release put out by the SEC indicating its recent filing of 30 enforcement actions against 68 individuals and companies for allegedly engaging in various types of financial reporting fraud.’’ And then it goes on to say ‘‘In any event,

I thought that you might be interested in seeing the sorts of practices that the SEC has been focusing its attention on.’’

And then the attached memo from the SEC says: ‘‘Together’’, and

it is talking about these enforcement actions, ‘‘these actions allege

a variable cookbook of recipes for fraudulent accounting and reporting, including’’ and then it lists a whole bunch of things including

as some of the things that we now know happened with

HealthSouth. Things like creation of fictitious invoices, back dating

of agreement, reporting of expenses as capital assets, over valuations of inventory.

So I guess my question to you is if you had not heard of any allegations of accounting abuses before then, why on earth did you

send the CFO and the controller this memo?

Mr. HORTON. I think, you know, if you look back at my correspondence over the years that I was at HealthSouth, you will

find that not infrequently if the SEC announced something that it

regarded as a significant development, I would circulate it to people that I thought would be interested in it.

111

Ms. DEGETTE. Oh, okay. So this was just part of your routine

correspondence with the senior management of the company?

Mr. HORTON. Yes, ma’am.

Ms. DEGETTE. How many times would you say you sent memos

like this out?

Mr. HORTON. I could no give you an accurate number. If you go

back in—certainly in the period 2001/2002 when the SEC was

doing a significant amount of pronouncing, if you will, on financial

reporting and management discussion and analyses and filings and

that sort of thing, I think you will find several things that I provided to people in connection with regulation——

Ms. DEGETTE. Well, what about in 19—I think you said you

started in 1994?

Mr. HORTON. Yes, ma’am.

Ms. DEGETTE. What about the period 1994 to 2001?

Mr. HORTON. Again, I mean there is no magic to the number. But

you will go back and I think you will find—you will find these sorts

of things going back pretty much the whole period of time that I

was with the company. It is one of the things that I did.

Ms. DEGETTE. Thank you.

Mr. GREENWOOD. The Chair thanks the gentlelady.

The chair thanks the witnesses for your willingness to come here

today and for your testimony. I know it has been a long day.

As far as I can tell, this the tragic case, another tragic case

where a company that had lots of potential filled with thousands

of honest, good employees had a leadership at the top that was corrupt. And it is evidenced at least by the five CFOs that have already plead guilty, 10 other senior executives having plead guilty.

Mr. Scrushy still maintains his innocence. And we will be watchful

of how that turns out.

This will play itself out in the courts. And we wish the company

well. We think the company has new management that is going to

do its level best to bring this company into a new and brighter era,

in that the company will be vital and that the employees will continue to provide the services that they do out in those little clinics

to people who are in pain, which is what a company like this

should have been focused on.

I imagine some of the witnesses, including probably all of you,

will wind up giving your testimony in a court of law before this

over. I wish you well on that.

And I enter into the record a ‘‘Wall Street Journal’’ article from

yesterday, entitled ‘‘Scrushy Claims FBI Agent is Close to Witness’’

and it talks about what we have talked about here with regard to

the taped conversations. But it also says this: ‘‘Earlier this month

Mr. Scrushy’s attorney, Richard Dean, Jr. a well respected U.S. attorney who works in the Atlantic office of Jones Day, became more

involved in Mr. Scrushy’s defense. Donald V. Watkins, a Birmingham attorney who directs Mr. Scrushy’s defense says the legal

team has held focus groups to test how a jury might react to any

dirt they may have on the 15 former HealthSouth executives who

have agreed to plead guilty in connection with the case and others

who might testify against Mr. Scrushy. Mr. Watkins, the lead attorney for Mr. Scrushy, says such details are fair game for public

disclosure. ‘‘Human beings make mistakes in life. Some as a result

112

of negligence, other as a result of lifestyles, intentional acts of deception. It is our job to find out who these people really are’’ Mr.

Watkins said. This case has everything in it. It has mystery. It has

got sex. It has got death. And it is high stakes. It is a real life

drama being played out on a daily basis before a national audience.’’

So those are the tactics to which Mr. Scrushy is prepared to go

in his defense. And I wish you well in dealing with those kinds of

tactics when this matter goes to court.

Thank you again.

And the subcommittee is adjourned.

[Whereupon, at 4:08 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

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